T.C. Memo. 2002-90
UNITED STATES TAX COURT
WILLIAM L. RICHTER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19912-98. Filed April 5, 2002.
Paul J. Sulla, Jr., for petitioner.
Jonathan J. Ono, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Respondent determined a deficiency in
petitioner’s 1995 Federal income tax of $513. The sole issue for
consideration is whether petitioner is entitled to claim an
energy tax credit in 1995 of $513.
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FINDINGS OF FACT
The parties have stipulated some of the facts. The
stipulation of facts is incorporated by this reference.
Petitioner resided in Kaneohe, Hawaii, at the time the petition
was filed.
Solar Water Heating System
In or about 1994, petitioner investigated new water heating
systems in conjunction with remodeling his home. As part of his
investigation, petitioner authorized Joseph Miskowiec, a salesman
for Mercury Solar, an organization engaged in the sale of solar
energy heating systems, to conduct an energy audit of
petitioner’s home. The purpose of the energy audit was to
ascertain the amount of energy used in petitioner’s home, thereby
enabling Mr. Miskowiec to analyze whether petitioner should
install a solar water heating system in his home. Mr. Miskowiec
determined that petitioner’s hot water needs could be served by a
solar water heating system that would reduce petitioner’s total
monthly utility costs. Mr. Miskowiec ultimately recommended that
petitioner install a solar water heating system consisting of a
50-gallon storage tank, a 4- by 10-foot solar collector, a
heater, a pump, plumbing, controls, and sensors (collectively,
the heating system).
As part of his presentation to petitioner, Mr. Miskowiec
offered petitioner two options-–the option to purchase the
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heating system outright and the option to purchase only the
energy generated by the heating system. If petitioner chose to
purchase the heating system outright, Mercury Solar would require
payment in full for the installed heating system, and petitioner
would be responsible for all repairs beyond the company contract.
If petitioner chose to purchase only the energy generated by the
heating system, Mercury Solar would sell the heating system to an
environmental group which, in turn, would sell the energy to
petitioner in exchange for his monthly payments. This option
would provide petitioner with a longer warranty and service
period than an outright purchase would provide. After reviewing
his options, petitioner, in November 1995, opted to purchase only
the energy generated by the heating system because of the low
cost and the warranty with service.
After petitioner decided to enter into an energy purchase
agreement, Mr. Miskowiec drafted a proposal, dated November 2,
1995, for petitioner’s heating system, and he submitted the
proposal to Mercury Solar and to Hawaii Environmental Holdings
(HEH), an environmental group, for their review. The proposal
indicated that HEH’s total investment would be $5,131 and that
its total direct cost would be $2,218. The proposal also
referenced a Federal tax credit of $513, a State tax credit of
$1,750, and an unexplained amount of $650 labeled “H.E.H”. Both
Mercury Solar and HEH accepted the proposal.
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To implement the proposal, the following documents were
prepared:
1. A Solar Energy Purchase Agreement (the purchase
agreement), dated November 2, 1995, by and between HEH as seller
and petitioner as purchaser, in which HEH agreed to sell to
petitioner all of the energy produced from the heating system.
Under the purchase agreement, HEH retained ownership of the
heating system and agreed to sell energy from the heating system
to petitioner and to install, service, maintain, and repair the
heating system during the purchase agreement’s term. HEH also
agreed to make any improvements necessary to complete the
installation, without any additional cost to petitioner. HEH
provided a comprehensive warranty for the term of the purchase
agreement, including a promise to perform all required
maintenance without additional cost to petitioner. The payment
schedule specified in the purchase agreement required petitioner
to pay HEH (a) $46 per month for each of the first 36 months,
except that in months 6, 12, and 36 petitioner was required to
pay $2,263, $650, and $700, respectively; (b) nothing for months
37 through 60; and (c) $20 for month 61. The payments required
under the agreement totaled $5,151. The agreement was to be in
effect for a period of 5 years and 1 month from the date on which
the heating system became fully operational.
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2. A Metering and Solar Energy Service Guarantee in which
HEH guaranteed that petitioner’s fossil fuel consumption would
not exceed a specified amount per year (assuming certain
conditions were met) and provided a service guarantee requiring
it to repair and upgrade petitioner’s heating system and to take
other remedial action if petitioner consumed “more fossil fuel
than guaranteed”.
3. An Option to Extend Term; Option to Purchase Component/s
in which HEH agreed to remove its equipment at the end of the
purchase agreement but provided petitioner with the option to
extend his purchase agreement for an additional 61-month period
(the second term) “at a reduced monthly rate of 2% of the
existing contracts (sic) smaller monthly energy payment rate”
(i.e., 92 cents per month). The option agreement also gave
petitioner the option at the end of the second term to purchase
one or more components of the solar energy collection equipment
based on a price to be determined under the option agreement.
4. A Memorandum of Heated Solar Water Service Agreement &
Roof Release confirming that petitioner had leased to HEH the
roof of his premises “for purposes including but not limited to
operating the solar water heating system.”
5. A Solar Partnership Agreement (the partnership
agreement) in which HEH agreed to pay petitioner $650 upon
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completion of the initial term’s 12th month in exchange for
allowing HEH to place its equipment on petitioner’s property and
for petitioner’s providing HEH with the names of seven referrals,
writing a letter regarding his experience with the heating
system, and paying all of the required payments on time.
Although some of the above-described documents do not appear
to have been fully executed, both petitioner and HEH executed the
purchase agreement. Pursuant to that agreement, the heating
system was installed in petitioner’s home and became operational
on December 7, 1995. Although there were several instances
during the initial term of the purchase agreement when the system
did not work correctly, HEH arranged for the necessary repairs at
no additional cost to petitioner.
As of the date of trial, petitioner had made the payments
required under the purchase agreement for the initial term. At
trial, petitioner testified that he is satisfied with his heating
system, which allegedly has a useful life of 15 to 20 years, and
that he intends to renew his purchase agreement for a second
term.
Petitioner’s Relationship With HEH
HEH purports to have been created pursuant to a Contract and
Declaration of Creation of Unincorporated Business Organization
(the declaration). The declaration confers upon HEH’s trustees
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broad powers “to do anything any citizen may do in any state or
country” and “to construe the meaning and intent of this Contract
and the Trustee(s)’ construction shall be conclusive, legally
binding and will govern.”
According to certain minutes of Hawaii Environmental
Holdings introduced into evidence at trial, the initial trustee,
Lee Allan Hansen, served as sole trustee from June 1, 1993, until
May 20, 1996. On May 21, 1996, Lee Allan Hansen appointed two
additional trustees, Cynthia Kay McNeff and James Scott Sparkman
(Mr. Sparkman). At the time of the trial, Mr. Sparkman claimed
to be the sole trustee of HEH as well as the sole beneficiary of
Mercury Solar, which he described as a business trust.1
HEH’s minutes record that HEH’s goal was to eliminate “the
use of fossil fuels as an energy source for the planet as well as
the state of Hawaii.” The minutes also state that the trustees
were to accomplish this goal through a grassroots referral-based
marketing plan, sales of solar energy, and discretionary
allocations of tax benefits to beneficiaries.
The partnership agreement provided, in relevant part: “By
signing this document you have become a beneficiary of H.E.H.
You will be given a certificate documenting this fact along with
a description of your rights and privileges as a beneficiary.”
1
Mr. Sparkman owned Mercury Solar until 1993. At the time
of the trial, Mr. Sparkman was receiving payments from Mercury
Solar as a technical assistant manager.
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Mr. Sparkman testified that HEH issued to petitioner a
Certificate of Evidence of Right of Distribution of Hawaii
Environmental Holdings (the certificate). The certificate
purported to evidence petitioner’s ownership of one beneficial
unit and HEH’s conveyance of the right to claim a Federal
investment credit for $513 and a solar energy tax credit for the
State of Hawaii for $1,750. The certificate, however, was not
executed by the trustee or by any other agent of HEH.
Relevant Tax Returns
For the taxable year 1995, HEH filed a Form 1041, U.S.
Income Tax Return for Estates and Trusts, which reported a net
loss of $16,054. HEH attached to its 1995 return a Schedule C,
Profit or Loss from Business, which reported the operating
results from its sale of solar energy and showed a net profit of
$30,159.
In connection with its 1995 Form 1041, HEH issued a Schedule
K-1, Beneficiary’s Share of Income, Deductions, Credits, etc., to
petitioner indicating that HEH had allocated $513 to petitioner
as an energy credit. The Schedule K-1 did not reflect that any
other item was allocable to petitioner for 1995.
In accordance with the Schedule K-1 issued to him by HEH,
petitioner claimed a passthrough energy credit of $513 on Form
3468, Investment Credit, to his 1995 tax return. Petitioner also
claimed a passthrough energy conservation tax credit of $1,750 on
his Form N-157, Credit for Energy Conservation, included as part
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of his 1995 Form N-11, State of Hawaii Individual Income Tax
Return.
Notice of Deficiency and Related Matters
On October 6, 1998, respondent issued a notice of deficiency
disallowing the Federal energy credit claimed by petitioner on
his 1995 return. The notice described respondent’s basis for the
determination as follows:
It is determined that you are not entitled to the
energy credits you have claimed. It has been
determined that you are not entitled to receive
earnings from the trust. Since you do not share in the
earnings of the trust, you are not allowed to receive
passthrough credits. Further, it is determined that
the energy contracts were in substance, a sale of solar
equipment to you. This determination would also
prevent the passthrough of any energy credits.
Petitioner filed his petition contesting respondent’s
determination on December 14, 1998. Over a year after petitioner
filed his petition in this case, HEH arranged for the preparation
of an amended Form 1041 for 1995, on which HEH claimed total net
income of $315,870 (including net profit from its Schedule C of
$361,983), an income distribution deduction of $316,526 for
distributions allegedly made to HEH’s certificate holders, and a
tentative general business credit of $111,638 consisting of a
current year investment credit of $73,552 and a credit
carryforward of $38,086.2 An amended Schedule K-1 was also
2
Mr. Sparkman testified that HEH amended its 1995 return
(continued...)
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prepared for petitioner showing an allocation to petitioner of
$650 of nonpassive income and $650 of depreciation. The
allocation of $650 of nonpassive income was attributable to the
$650 petitioner was scheduled to receive from HEH in late 1996
pursuant to the partnership agreement.
OPINION
Prior to November 5, 1990, individual taxpayers were
permitted to claim a residential energy credit against their
income tax liability. Sec. 23(a)(2),3 (b)(2), and (c)(2)(A), (5)
(before its repeal by the Omnibus Budget Reconciliation Act of
1990 (OBRA), Pub. L. 101-508, sec. 11801(a)(1), 104 Stat. 1388-
520). Effective November 5, 1990, OBRA sec. 11801(a)(1) repealed
the residential energy credit for individuals. The energy
credit, however, continued to be deductible after 1990 as part of
the general business credit available to certain taxpayers,
including certain trusts and estates. Sec. 38; see also sec.
50(d) (providing that, in calculating the general business credit
authorized by sections 46, 48, and 50, the rules of section 48(f)
relating to certain estates and trusts continue to apply).
2
(...continued)
because the original return reported distributions incorrectly as
interest.
3
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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As in effect for 1995, section 38(a)(2) and (b)(1) provides
for a credit against a taxpayer’s income tax in the amount of the
investment credit determined under section 46. Section 46
provides that the amount of the investment credit, as relevant
here, is the amount of the energy credit. The amount of the
energy credit is equal to 10 percent of the basis of the energy
property4 placed in service during the taxable year. Sec.
4
Energy property is defined in sec. 48(a)(3) as any
property–-
(A) which is–-
(i) equipment which uses solar energy to
generate electricity, to heat or cool (or provide
hot water for use in) a structure, * * *
* * * * * * *
(B)
(i) the construction, reconstruction, or erection
of which is completed by the taxpayer, or
(ii) which is acquired by the taxpayer if the
original use of such property commences with the
taxpayer,
(C) with respect to which depreciation (or
amortization in lieu of depreciation) is allowable, and
(D) which meets the performance and quality
standards (if any) which–-
(i) have been prescribed by the Secretary by
regulations (after consultation with the Secretary
of Energy), and
(ii) are in effect at the time of the
acquisition of the property.
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48(a)(1) and (a)(2)(A). The energy property must be depreciable,
which requires that the property be used in a trade or business
or held for the production of income. Secs. 48(a)(3)(A)(i), (C),
176(a).
A trust is eligible for the energy credit if it places
qualifying energy property in service during the taxable year.
The trust must apportion its basis in the qualifying energy
property among itself and its beneficiaries. Secs. 38(a),
(c)(3)(D), 46(2), 48(a)(1). Although there is no current
provision in the Code that governs the apportionment of an
investment in energy property among a trust and its
beneficiaries, section 50(d)5 refers taxpayers to specific
provisions in effect prior to the enactment of OBRA. One of
those provisions, section 48(f)6 (as in effect on the day before
5
Sec. 50(d) provides: “For purposes of * * * [secs. 46, 48,
and 50], rules similar to the rules of the following provisions
(as in effect on the day before the date of the enactment of the
Revenue Reconciliation Act of 1990) shall apply: * * * (6)
Section 48(f) (relating to certain estates and trusts).”
(Emphasis added.)
6
Sec. 48(f) (as in effect on the day before the enactment of
OBRA) provides:
SEC. 48(f). Estates and Trusts.--In the case of an
estate or trust--
(1) the qualified investment for any taxable
year shall be apportioned between the * * * trust
and the beneficiaries on the basis of the income
of the * * * trust allocable to each, and
(continued...)
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the enactment of OBRA), provides that the qualified investment
must be apportioned among the trust and its beneficiaries on the
basis of the trust’s income allocable to each. See also sec.
1.48-6, Income Tax Regs. In enacting section 48, Congress
recognized that when income is taxed in part to an organization
and in part to its shareholders or beneficiaries, the investment
credit is apportioned among the parties in accordance with their
sharing of income for tax purposes. S. Rept. 1881, 87th Cong.,
2d Sess. (1962), 1962-3 C.B. 707, 726; H. Rept. 1447, 87th Cong.,
2d Sess. (1962), 1962-3 C.B. 405, 419.
Respondent disallowed petitioner’s energy credit because he
determined none of HEH’s income was allocable to petitioner
during 1995 and, alternatively, because the purported purchase of
energy was, in substance, a sale of solar equipment to
petitioner. Because we hold that petitioner has failed to prove
that any of HEH’s income or HEH’s investment in energy property
was allocable to him during 1995, we need not address
respondent’s second argument.
6
(...continued)
(2) any beneficiary to whom any investment
has been apportioned under paragraph (1) shall be
treated (for purposes of * * * [secs. 46, 48, and
50]) as the taxpayer with respect to such
investment, and such investment shall not (by
reason of such apportionment) lose its character
as an investment in new section 38 property or
used section 38 property, as the case may be.
[Emphasis added.]
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Tax credits are a matter of legislative grace, and
petitioner bears the burden of proving his entitlement to the tax
credit he claimed.7 Rule 142(a); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934). Petitioner maintains he is
eligible for the energy credit based upon his status as a
beneficiary of HEH. The parties do not dispute that, if HEH
placed depreciable solar energy property in service during 1995,
HEH became eligible for the energy credit through its ownership
of that property. Secs. 38(b)(1), 46(2). Petitioner asserts
that the apportionment of part of HEH’s energy credit to him was
proper because HEH was required to allocate $650 of HEH’s income
to him under the terms of the partnership agreement and HEH
actually allocated $650 of income to him for 1995, as evidenced
by the amended Schedule K-1 for 1995.
While it is true that the partnership agreement reflects an
obligation on the part of HEH to allocate and distribute $650 to
petitioner, HEH’s obligation was subject to certain conditions
which required petitioner to identify several referrals, write a
letter of reference, and make his energy payments on time.
Moreover, under the terms of the partnership agreement, HEH was
7
Sec. 7491, which is effective for Court proceedings that
arise in connection with examinations commencing after July 22,
1998, places the burden on the Commissioner in certain
circumstances. However, petitioner has not contended, nor is
there evidence, that his examination commenced after July 22,
1998, or that sec. 7491 applies.
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obligated to pay petitioner $650 only upon completion of the 12th
month of petitioner’s contract, if petitioner complied with his
obligations.
The record indicates that petitioner did not send the
required reference letter to HEH detailing his experience with
the solar energy heater until November 1996. Consequently, the
earliest date that HEH was obliged to allocate income to
petitioner was November 1996. In addition, petitioner produced
no evidence, other than the conflicting testimony of Mr.
Sparkman, that the $650 was ever actually allocated or
distributed to petitioner.
Similarly, the other documentary evidence petitioner
produced does not adequately support his assertion that HEH
actually allocated income to petitioner for 1995. Petitioner did
not claim any income from HEH on his 1995 return and has not
filed an amended return. Furthermore, HEH did not report any
allocation or distribution of income to petitioner on its
original 1995 Form 1041 or on the original 1995 Schedule K-1
issued to petitioner.
Petitioner introduced at trial what purports to be HEH’s
amended 1995 return and an amended 1995 Schedule K-1 as proof
that HEH earned income and allocated $650 of that income to
petitioner for 1995. The record does not show, however, whether
HEH’s amended return was actually filed. Although the amended
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return claims that HEH had distributable net income and actually
made income distributions of $316,526, the return was not
prepared until after petitioner filed his petition in this case
and is simply not probative or trustworthy. HEH’s amended return
was signed by Mr. Sparkman less than 1 month prior to trial and
is not corroborated by any credible evidence. In the absence of
corroborating evidence, we are not required to accept the self-
serving testimony of petitioner or other interested witnesses.
Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485, 512
(1984); Day v. Commissioner, 975 F.2d 534, 538 (8th Cir. 1992),
affg. in part, revg. in part on another ground and remanding T.C.
Memo. 1991-140; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
Because we are not convinced on this record that any part of
HEH’s income was allocable to petitioner or that HEH allocated a
portion of its investment in qualifying energy property to
petitioner for 1995, we hold that petitioner is not entitled to
the $513 energy credit claimed on his 1995 return.
We have carefully considered all remaining arguments made by
petitioner for contrary holdings and, to the extent not
discussed, find them to be irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.