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SPECIAL INDUSTRIES

property” and must be excluded from Economic Emergency Powers Act and Basis reduction and
eligible basis for purposes of the credit certain other provisions.³⁰ recapture rules
under Sec. 48D. Accordingly, the IRS Under Sec. 50(a)(6)(D), the term Once a taxpayer determines whether it
and Treasury may consider address- “applicable transaction” is defined can qualify for the Sec. 48D credit by
ing methods for allocating qualifying as any “significant transaction,” as satisfying the definition of an “eligible
activity and nonqualifying activity determined by Treasury, in coordina- taxpayer,” it is important to understand
related to buildings, as well as for tion with Commerce and the U.S. how the credit may be lost or reduced
equipment (dual-function property). Department of Defense, involving the pursuant to the relevant recapture, or
material expansion of semiconductor clawback, rules. The general rules for
Eligible taxpayer, foreign manufacturing capacity of an applicable ITC recapture under Sec. 50, together
entity of concern, and taxpayer in China, Russia, or other with the special recapture rules incor-
applicable transaction foreign country of concern, as defined porated into that section by the CHIPS
Sec. 48D(c) defines an “eligible by Section 9901(7) of the 2021 NDAA. Act of 2022 (i.e., Secs. 50(a)(3) and
taxpayer” as any taxpayer that: (1) is A transaction is excluded from being a (a)(6)(D)), apply to the Sec. 48D credit
not a “foreign entity of concern,” as significant transaction if it involves the and the elective payment provision if
defined by Section 9901(6) of the expansion of the taxpayer’s manufactur- the direct-pay election is made.
2021 NDAA, and (2) has not made ing capacity of certain “legacy semi- In general, these rules provide that
an “applicable transaction,” as defined conductors.” Under Section 9902(a)(6) the Sec. 48D credit is subject to recap-
by Sec. 50(a), during the tax year.²⁸ of the 2021 NDAA, the term “legacy ture if the qualified property placed
The term “foreign entity of semiconductor” includes: in service by the taxpayer as part of
concern” is defined as including any an advanced manufacturing facility
foreign entity, including a foreign (I)(aa) a semiconductor technology ceases to be eligible for the credit in the
individual, a foreign country or politi- that is of the 28 nanometer genera- taxpayer’s hands or is disposed of by
cal party, or a partnership, association, tion or older for logic; (bb) with re- the taxpayer (each a “recapture event”)
corporation, organization, or other spect to memory technology, analog within a five-year period beginning on
combination of persons organized, technology, packaging technology, the placed-in-service date of the quali-
or having its principal place of busi- and any other relevant technology, fied property (recapture period). The
ness, in a foreign country, that is (1) any legacy generation of semicon- credit vests by 20% each full year the
owned by, controlled by, or subject ductor technology relative to the associated property is placed in service
to the jurisdiction or direction of generation described in item (aa), as during the five-year recapture period.
a foreign country that is listed as a determined by the Secretary, in con- If a recapture event is triggered
“covered nation” under 10 U.S.C. sultation with the Secretary of De- before the date that is one year from
Section 4872(d)(2)²⁹ (i.e., China, fense and the Director of National the placed-in-service date, the re-
Russia, North Korea, or Iran); (2) a Intelligence; and (cc) any additional capture percentage is 100% (i.e., full
designated foreign terrorist organiza- semiconductor technology identified recapture). The recapture percentage
tion; (3) an entity included on the by the Secretary in a public notice is reduced to 80% if a recapture event
list of specially designated nationals issued under clause (ii); and occurs during year 2; to 60% during
and blocked persons maintained by (II) does not include a semiconduc- year 3; to 40% during year 4; and to
Treasury’s Office of Foreign Assets tor that is critical to national secu- 20% during year 5.³¹ Certain exceptions
Control; or (4) that has been alleged rity, as determined by the Secretary, to recapture apply in the case of mere
by the U.S. attorney general to have in consultation with the Secretary changes in the form of ownership of
engaged in certain criminal activi- of Defense and the Director of Na- the qualified property eligible for the
ties in violation of the International tional Intelligence. Sec. 48D credit.

28. Note that although Sec. 48D(c)(1) provides that “foreign entity of concern” is 30. See 15 U.S.C. §§4651(6) and (8).
defined by §9901(6) of the 2021 NDAA, the CHIPS Act of 2022 redesignates 31. Sec. 50(a)(1).
paragraph 6 as paragraph 8.
29. Formerly 10 U.S.C. §2533c(d)(2), prior to its transfer and redesignation by
§§1870(d)(2) and (3) of the 2021 NDAA, as amended by §§1701(t)(2)(B)
and (C) of the National Defense Authorization Act for Fiscal Year 2022, P.L.
117-81.

36 April 2023 The Tax Adviser