Golan: Individuals successfully claim ITC

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Publication August 9, 2018

Solar tax benefits were allowed to two individuals on three rooftop solar installations after the IRS made a mistake.

Individuals usually have a hard time claiming investment tax credits and depreciation on solar equipment put to commercial use. Passive loss restrictions and at-risk rules make such benefits hard for them to use. First, individuals can only use such tax benefits against income from other passive investments, unless they are personally engaged in the business. Second, at-risk rules limit the depreciation that can be claimed to the amount of equity the individual has in the equipment.

A licensed contractor and lawyer who had been working on low-income housing transactions installed rooftop solar systems on a warehouse, a rental property and a residence in California in 2010 and entered into five-year power contracts with each of the property owners to provide electricity at a discount to the local utility rate.

The contractor then sold the rooftop systems and assigned the power contracts to Donald and Sheila Golan in January 2011 for $300,000.

The Golans claimed 30% investment tax credits and a 100% depreciation bonus on the systems in 2011. (A 100% depreciation bonus means the full depreciation was claimed in 2011.)

The IRS disallowed the tax benefits, but cited the wrong tax code sections in its notice of disallowance. The case landed in the US Tax Court. Taxpayers usually have the burden of proof to show the IRS is wrong. However, in this case, the burden shifted to the IRS because it was considered to be making a new argument in court.

The IRS argued the solar equipment was already in service before it was sold to the Golans. An investment tax credit can only be claimed on new equipment. The court said the systems did not appear to have been connected to the grid until after the sale.

The Golans never actually paid $300,000. They agreed to pay $90,000 down, but ended up paying only $80,000 of the amount, and not until 2012 and 2013.

As for the rest, they claimed an offset against the purchase price for $57,750 in utility rebates that the local utilities paid the electricity customers and that the customers assigned to the contractor who did the installation, and they gave the contractor a note for $152,200 to cover the remaining purchase price. The note had a maturity date in 40 years and bore 2% annual interest, but did not provide for any fixed payments. Instead, the Golans were required to pay all revenue generated by the solar equipment toward the note balance until the note was paid off. After a default, the contactor was supposed to foreclose first on the solar equipment, but could then go after the Golans for any shortfall.

The court said that since none of the down payment was paid in 2011, it could not be used to calculate tax benefits in 2011. It said the $57,750 in utility rebates was never paid by the Golans to the contractor. If they had done so, they would have had to have reported the rebates as income first.

However, it let the note for $152,200 be counted as a 2011 payment because the Golans had effectively personally guaranteed payment.

As for the passive loss rules, the Golans said in court that they spent more than 100 hours during 2011 on “the solar energy venture.” That was enough, the court said, for the Golans to show “material participation” in the business as long as no other individual involved with it, including contactors, spent more time. The IRS offered no data.

The case is Golan v. Commissioner. The Tax Court released its decision in June.


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