What is structural risk in tax credit transactions?

June 2, 2026

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Structural risk refers to improper structuring of a tax credit transfer or the use of ineligible entities. If structural risk arises, the Internal Revenue Service (IRS) can disallow the tax credit transfer even if the underlying tax credits were validly generated. Whether purchasing transferable credits or deploying capital through tax equity structures, buyers and investors need to understand how the legal architecture of a transaction — not just the underlying project — can affect whether the IRS ultimately respects their claim to a credit.

This installment of Crux's series on underwriting transaction risks discusses structural risk: what it is, how it arises, and how tax credit buyers and investors evaluate and mitigate it so they can transact with confidence.

Key takeaways

Structural risk refers to improper structuring of a tax credit transfer or the use of ineligible entities. In cases of improper structuring, the IRS can disallow the credit transfer even if the underlying credits were validly generated.
Section 6418 has substantially reduced the structural risks that historically defined tax equity transactions, but a narrower set of structural considerations remains relevant to direct transfers and is squarely present in hybrid structures.
Structural risk arises from defects in the transaction architecture: party eligibility, the chain of ownership of the credit-generating property, the §6418 election mechanics, pre-filing registration, and partnership-level allocations in tax equity and hybrid structures.
Buyers and investors mitigate structural risk through legal diligence, transaction reps and warranties, indemnities, tax opinions, and — where appropriate — tax credit insurance.

What is structural risk?

Structural risk refers to the possibility that a tax credit transfer fails — in whole or in part — because of a defect in how the transaction was legally structured, rather than a defect in the underlying credit.

The credits may have been validly generated by a qualifying project, but if the parties, ownership chain, documentation, or election mechanics don't satisfy the requirements of Section 6418 and its regulations — or, in tax equity, the requirements of Subchapter K and applicable IRS guidance — the transfer can fail. For a buyer or investor, the consequence is the same as any other disallowance: lost credit value, interest, potential penalties, and the need to look to the seller or insurance to be made whole.

In the traditional tax equity market, structural risk historically referred to a specific concern: the risk that the IRS would not respect the partnership used to allocate tax credits to the investor — for example, by recharacterizing the investor as a lender rather than a partner, by finding that the partnership failed to satisfy applicable IRS guidance.

Section 6418 has substantially eliminated this concern for direct transfers since for those transactions no partnership is required to move the credit from seller to buyer. As a result, the term has evolved: in the context of transferability, structural risk refers to the narrower set of defects that can arise in the §6418 transfer mechanics themselves — and, in hybrid structures, to the combined risk of the underlying partnership and the downstream transfer.

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How does structural risk arise?

Structural defects can show up at several stages of a §6418 transaction. The most common categories include:

Party eligibility

Only an "eligible taxpayer" can make a §6418 election under the statute, and the seller must actually own the credit-generating property at the time the credit is determined. If the seller sits inside a partnership, tiered ownership structure, or hybrid tax equity arrangement, confirming eligibility requires walking the chain of ownership and tracing the partnership's allocations. Certain entity types — including most tax-exempt organizations — are not eligible to use §6418 and instead must use the direct pay provisions of §6417. A misclassified or ineligible seller can invalidate the transfer.

Buyer eligibility is also a consideration. Prohibited foreign entity provisions broadened by the One Big Beautiful Bill (OBBB) prohibit taxpayers from transferring credits to specified foreign entities (SFEs).

Pre-filing registration

Sellers must complete pre-filing registration with the IRS and receive a registration number tied to the specific facility and tax year before the transfer is reported. A registration number that does not match the facility, covers the wrong tax year, or was not obtained in time can invalidate the transfer.

Single-transfer rule

Section 6418 permits a credit to be transferred only once, and only by the original eligible taxpayer. Attempted re-transfers, or transfers by a party that is not the credit owner, are void.

Timing and election mechanics

The transfer election is made on the seller's return for the year the credit is determined, and the buyer claims the credit in that same year. Mismatched tax years, late elections, or amended return complications can create exposure for both sides.

Partnership-level issues

When the seller is a partnership, the §6418 election is made at the entity level. The cash paid by the buyer is treated as tax-exempt income to the partnership and must be allocated to the partners consistent with the partnership agreement, §704(b), and the §6418 regulations. Errors in allocation, characterization of cash consideration, or partner-level reporting can produce downstream defects.

Hybrid structures

Deals that pair a §6418 transfer with a tax equity partnership — increasingly common in the market — introduce additional complexity. The partnership must independently satisfy the requirements of a valid tax equity partnership under Subchapter K, and the subsequent transfer must satisfy the §6418 requirements. Defects in either set of rules can compromise the credit.

Documentation

The transfer agreement, the §6418 minimum required documentation package substantiating the credit, the registration record, and the buyer's substantiation file all need to align. Inconsistencies or gaps can create exposure on audit.

How do buyers and investors evaluate and mitigate structural risk?

Structural risk is principally a legal and tax diligence question, and the market has developed a well-established mitigation playbook.

Legal and tax diligence

The single most important mitigant is experienced legal and tax counsel. Buyer's counsel verifies that the seller is an eligible taxpayer, that it owns the credit-generating property, and — where partnerships or tiered structures are involved — that the chain of ownership and allocations support the election. Counsel also confirms the pre-filing registration number, verifies it is tied to the correct facility and tax year, and reviews the §6418 minimum documentation package.

In tax equity and hybrid structures, counsel reviews the partnership agreement, capital contribution schedules, flip economics, allocations, and cash distribution waterfalls to confirm conformity with applicable safe harbors.

Transfer agreement protections

Well-papered transfer agreements include representations and warranties on seller eligibility, registration, single-transfer status, and the absence of competing transfers, along with covenants requiring seller cooperation in audit and access to substantiation. The vast majority of tax credit transfer agreements include "no-fault" indemnity provisions, meaning the buyer is entitled to be made whole for any reduction in credit value — including those resulting from structural defects — even if the loss does not result from a breach of the seller's representations.

Tax opinions

For traditional tax equity and hybrid structures, investors typically require a tax opinion from outside counsel addressing partnership validity and the respect of credit allocations. Tax opinions document the legal basis for the structure and can support penalty defenses in the event of an IRS challenge.

Tax credit insurance

Tax credit insurance can cover structural risk, including improper structuring and the use of ineligible entities. Insurance policies may cover disallowance of the transferred credit for structural defects and should compensate the buyer for any tax liability, interest, penalties, and gross-up. Buyers should confirm with their broker that the policy specifically covers structural defects and that limits are sized appropriately to the deal.

Standardized documentation and experienced counterparties

The market has reduced structural risk through standardization. Sellers and buyers work with counsel and advisors like Crux that have papered hundreds of §6418 transfers benefit from vetted agreements, established registration practices, and lessons learned from prior deals to reduce the incidence of structural defects.