The White House review of proposed rules for an expanded credit for capturing and storing carbon dioxide resulted in changes that give the IRS more time to take back the credits in case of carbon leaks.
Officials changed the “recapture” period to five years while the rules were under review, an increase from the three years proposed in the initial draft submitted to the office on March 13 and obtained by Bloomberg Tax. This increases the financial risk for investors in these projects, as they’re generally the ones reaping the tax benefits and want some assurance that the IRS won’t take them back.
“That provides some markers that there’s a difference of opinion in the administration,” said Hunter Johnston, a partner at Steptoe & Johnson LLP in Washington, who is involved with the Carbon Capture Coalition lobbying group. “Where five years came from, I don’t know, but I’m going to find out.”
The White House review became a standard element of the IRS and Treasury’s regulatory process roughly two years ago. Significant tax regulations must be reviewed by Office of Information and Regulatory Affairs officials before they can be released. The review process gives companies and their lobbyists a chance to sway the guidance process through meetings with officials.
White House officials scheduled seven meetings with companies and organizations while the rules were under review. Representatives of Occidental Petroleum, the Environmental Defense Fund, ExxonMobil, and Shell Oil Co. were among those making their case, according to the Office of Management and Budget’s website.
The IRS released the proposed rules (REG-112339-19) on May 28. Another detail added during White House review highlighted that earlier guidance (Rev. Proc. 2020-12) allowed investors financing the projects to get insurance for the risk that the IRS might take back their credits. But the change to the recapture period would make that insurance more expensive, said Amish Shah, a partner at Eversheds Sutherland LLP in Washington.
“It’s kind of the low-probability, very high-dollar value risk,” Shah said. “You look at that and you say, ‘Well, we might be confident that we don’t think there’s a risk, but it’s still there, and if it happens, it’s just a lot of dollars on the line.’”
The tax code Section 45Q rules follow Congress’s 2018 expansion of the tax credit, which is meant to encourage investment in carbon capture technology. The amount of the credit varies based on the type of storage employed but, for companies, the total value can be millions of dollars.
As the rules were under review, the Treasury watchdog released an explosive report that found that companies had improperly claimed nearly $900 million worth of credits. The report—requested by Sen. Bob Menendez (D-N.J.)—prompted calls for greater transparency.
Commenters had requested that the government publicly report the amount of carbon captured and stored by those receiving the credit. But added text in the rules cites a code section barring the IRS from releasing taxpayer information.
“The Treasury Department and the IRS appreciate the importance of shared and open information in this context and encourage transparency,” the added text reads. “However, there is no statutory requirement in Section 45Q for taxpayers, federal agencies, or industry groups to publicly display this information or otherwise make it available.”
Tax professionals who specialize in this area believe the addition was tied to the watchdog report and a sign that Treasury officials took its findings into account.
“Certainly the Menendez report may have been the impetus for them to clarify in their preamble here, ‘Sorry, some people suggested that we make this information public. We cannot do so,’” said David Lowman, a partner at Hunton Andrews Kurth LLP in Washington.
A spokesperson for Menendez didn’t respond to a request for comment on the rule changes. The IRS and Treasury didn’t immediately respond to requests for comment.