Tax Court Sustains Energy Credit And Bonus Depreciation For Distributed Generation Solar Projects

In a recent case, the Tax Court ruled in the taxpayer's favor as to three California distributed generation solar projects' eligibility for the energy credit under Section 48 and bonus depreciation under Section 168. However, the Tax Court did reduce the taxpayer's basis in the projects, and the taxpayer in the case enjoyed significant procedural advantages due to mistakes by the IRS.

In Golan v. Commissioner, T.C. Memo. 2018-76 (June 5, 2018), in late 2010 a solar contractor installed solar equipment on the roofs of three host properties and entered into power purchase agreements ("PPAs") with the property owners. The PPAs provided that the hosts would purchase electricity generated by the solar equipment at a discount to utility rates, while the solar contractor would retain the ownership of the equipment, including the right to any tax or other financial benefits, and would service and repair the equipment.

Mr. Golan, the taxpayer, in 2011 purchased the solar equipment, subject to the PPAs, from the solar contractor for a purported purchase price of $300,000, which was the sum of a purported $90,000 down payment, a $57,750 credit for certain rebates, and a $152,250 promissory note (which the taxpayer was the obligor under but the taxpayer also provided a personal guarantee thereof). The solar projects were not connected to the grid until after the taxpayer acquired them in 2011. The IRS unsuccessfully sought to disallow the taxpayer from taking energy credit and depreciation deduction with respect to the solar equipment.

Before we discuss the substantive holdings in this case, it is important to note that the holdings were based in large part on the IRS, unusually, having the burden of proof. Generally, taxpayers bear the burden of proof; however, the IRS in the notice of deficiency that was generated after the conclusion of the audit of the taxpayer, failed to properly raise the issues in the case. For instance, the notice of deficiency provided that the taxpayer's expenses did not qualify for the "Rehabilitation Credit" under Section 47 or expensing of business assets under Section 179; thus, missing that the tax credit in question was the energy credit under Section 48, and the deductions in question arose under Section 168(k) (bonus depreciation). These mistakes were fortuitous for the taxpayer as they shifted the burden of proof to the IRS with respect to the actual issues in the case.

The atypical procedural posture means that...