T.C. M em o . 2 0 2 1 -4 1

UNITED STATES TAX COURT
PRESTON OLSEN AND ELIZABETH OLSEN, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 2 6 4 6 9 -1 4 , 2 1 24 7 -1 6
. Fi l edAp ri l 6 , 2 0 2 1
.

Pau l W . J on es , fo r p et i t i o n ers . Sky l er K. Bradb u ry

an d Dav i dW . So ren s en , fo r res p on d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION LAUBER, J u d g e: Th es e cas es i n v o l v e i n v es t o rs i n a s o l ar p o wer t ax s h el t er
s ch em e. M o re t han 2 0 0 cas es i n v o l v i n g o t h er i n ves t o rs i n th e s am e s ch em e are b ei n g h el dp en d i n g t h e o u t co m e o f t h es e cas es . Th e p ro m o t ers o f t h e s ch em e s o l d p et i t i o n ers l i g ht -co ncen t rat i n g l en s es th atwere s up p o sed l y g o i ng t o b e u s edas
co m p o n en t s o f a s y s t em

t o g en erat e el ect ri ci t y . Th e p ro m o t ers t o ldp et i t i o n ers t h at Served 04/06/21- 2
-

[* 2 ] th ey co u l dzero o u t t h ei r Fed eral t ax l iab i l i t y b y cl ai m i n g en erg y

t ax cred i t s
an d d ep reci at i o n d edu ct i o n s o n t h e l en s es . Th e s o l ar p o wer p ro jectn ev er g o tp as t t h e res earch an dd ev el o p m en t (R&D) s t ag e, an dth e l en ses were n ev er p laced i n
s erv i ce t o p ro du ce en erg y . Pet i t i o ners cl ai m ed s ub s t an t i al d ep reci at i o n d edu ct i o n s an dt ax cred i t s at t ri b u t ab l e t o th e l en s es o n th ei r Fed eral i n co m e t ax retu rn s fo r 2 01 0 -2 0 1 4 . Fo r each y ear p et i t io n ers t h u s redu cedth ei r t ax ab l e i n co m e t o zero (o r cl os e t o i t ) an d cl ai m eds ub s t an ti al refu n d s. Th ey u s edth e refu n d s t o p u rch as e m o re l en s es , fo r wh i ch th ey

cl ai m edm ore d edu ct i o n s an dcred i t s t o g en erat e m o re refu n d s. Th i s p ro ces s co n t i n u edu n t il th e U.S. Dep art m en to f J u s t i ce (J u s t i ce Dep art m en t )
s o u g ht , an d ev en tu al ly

s ecu red , an i n

ju nct i o n t o s h u t d o wnth e t ax s h el t er. See Un i ted St at es v . RaPo wer-3 , LLC, 3 4 3 F. Supp . 3 d 1 1 1 5 (D. Ut ah 2 0 1 8 ), aff’ d , 9 6 0 F.3 d1 2 40 (1 0 t h Ci r. 2 02 0 ). Th e In t ern al Rev en u e Serv i ce (IRS o r res p o n d en t ) d i sal l o wedth e cl ai m ed d educt i o n s an dcred i t s an d d et erm i n edd efi ci en ci es an daccu racy -rel at edp en al ti es
u n d er s ect i o n 6 6 6 2 (a) as fo l l ows : 1

1 Al l s t atut o ry

referen ces are t o th e In t ern al Rev en u e Co de (Co d e) i n effect at al l rel ev an tt i m es , an dal l Ru l e referen ces are t o t h e Tax Co u rtRu l es o f Pract i ce an d Pro cedu re. W e ro u ndal l m o n et ary am ou n t s t o t h e n eares td o l lar.- 3
-

[* 3 ] Year Defi ci en cy Pen al t y 2 01 0 $ 3 0 ,7 6 0 $ 6 ,1 5 2 2 01 1 2 2 ,0 89 4 ,4 1 8 2 01 2 2 6 ,0 97 5 ,2 1 9 2 01 3 2 6 ,7 18 5 ,3 4 4 2 01 4 2 0 ,6 68 4 ,1 3 4 Res p o n d en th as co nced edth e accu racy -rel at ed p en al t i es b ecau s e th e IRS d i dn o t s ecu re t i m el y

s up erv i s o ry

ap p ro v al fo r t h em . 2 See s ec. 6 7 5 1 (b )(1 ); Cl ay v . Co m m i s s i o n er, 1 5 2 T.C. 2 2 3 (2 0 1 9), aff’ d, _

_ F.3 d_ _ , 2 02 1 W L 9 68 6 2 1 (1 1 t h Ci r. M ar. 1 6 , 2 0 2 1). Th e ques ti o n s rem ai n i n g fo r d eci s i on are wh et h er p et i t i o n ers
are en t i t l edt o d ep reci at io n d edu ct i o ns rep o rt edo n Sch edu l es C, Pro fi t o r Lo s s Fro m Bu s i n es s , an dwh et h er t h ey are en ti t l edt o en erg y

t ax cred it s rep o rt edo n Fo rm s 3 8 0 0 , Gen eral Bu s i n es s Cred i t. W e h o l d t h atthey are en t i t l ed t o n o n e o f t h e cl ai m edt ax b en efi ts . FINDINGS OF FACT Th es e fi n d i n g s are b as edo n th e p art i es ’ jo i n t s t i pu l at i o n o f fact s , th e ex h i b
i t s at t ach edth eret o , an d t h e ex h i b i t s an dt es t i m o ny p res en t edattri al . Pet i t i o n ers , wh o are h u s b an dan dwi fe, res i d edi n Ut ah wh enth ey fi l edthei r p et i ti o n s . Ab s en t

2 Res p o n d en th as al s o co n ced eda p ort i on o f t h e 2 0 1 0 d efi ci en cy . Inv i ew o f t h i s co n ces s i o n a Ru le 1 5 5 co m p ut at i o n wi ll b e n eces s ary .- 4
-

[* 4 ] s t ip u l at i o n t o th e co n t rary , v en u e fo r ap p eal o f t hes e cas es wo u l d b e t h e U.S. Co u rto f Ap p eal s fo r t h e Ten t h Ci rcu i t . See s ec. 7 4 8 2(b )(1 )(A). A. Th e So l ar Po wer Pro ject Th e s t o ry b eg i n s wi t h In t ern at i o n al Au t o m at edSy s t em s , In c. (IAS), an di t s fo u n der, Nel d on J o h n s o n . M r. J o h n s o n i n co rp orat edIAS t o i n v es t i g at e s up erm ark etch eck o u ts y s t em s , b u th e l at er red irect edth e co m pan y ’ s fo cu s t o s ol ar
en erg y . Al t h o u gh h e h ad n o b ack g ro u n di n en g i n eeri n g , h e as p i redt o d es i g n a
n ew m et h o do f co n vert i n g co n cen t rat eds o l ar p o wer i n to el ect ri ci t y . To p u rs u e t h atg o al an d t o p ro m o t e h i s p ro jectt o i nv es t ors , M r. J o h n s o n fo rm edatl eas tfo u r p as s t h ro u g h en t i t ies th ath e co nt ro l l ed : RaPo wer3 , LLC (RaPo wer), an d t h ree l i m i ted l i ab i li t y co m

p an ies (LLCs ) t h atwe wi l l refer t o co l l ect iv el y as LTB. M r. J o h n s o n s u rro u n d edh i m s el f wi t h fri en d s an dfam i l y wh o , l i k e h i m , h ad
n o ex p eri en ce i n th e en erg y i n du s t ry . Hi s s o n , Ran d al e J o h n s o n, n o m in al ly s erv ed i n a t ech n i cal d ev el o p m en tcap aci t y , b u th e ad m i t t ed l y “ wo re m an y

h at s . ” Greg Sh ep ard , a fri en d, s erv edas RaPo w er’ s “ di rect o r o f o p erat i on s ” an dl edi t s p ro m o t i on al o u t reach t o i n v es to rs . Atn o t i m e d i dRaPo wer o r an y o f i t s affi li at es
em pl o y an y fu l l -t i m e en g in eers . M r. J o h n s o n ’ s co n cep t was t o i n s t al l , o n m et al t o wers , array s o f “ Fres n el l en s es ” t h atwo u l db e u s edt o co n cen t rat e s u n li gh t . Th e Fres nel l en s was i n v en t ed- 5
-

[* 5 ] i n 1 8 2 2 b y Fren ch p h y s ici s tAu g u s t i n -J ean Fres n el fo r u s e i n l i g h t h ou s es . Fres n el l en s es were o ri g i n al ly m ad e o f g l as s an d were ex t rem el y h eav y . Bu tb y t h e 1 9 60 s p l as t i c v ers i o ns o f t h es e l en s es h adb eco m e av ai l ab le. M r. J o hn s o n
s el ect ed p l as t i c Fres n el l en ses fo r h i s p ro ject , ci t i n g t h ei r l ig h twei g h t an dl o w p ro duct i o n co s t . Th e l en s es arri v edas l arg e rect an g u l ar p l as t ic s heet s s t ack edo n p al l et s ; th e s h eet s h adt o b e cu ti n t o t ri an g l es an d h av e fram es at t ach ed b efo re t h ey
co u ldb e i n s t al l edo n a t ower. M r. J o h n s o n d es i gn eda “ du al ax is t rack er” t h atwas s up p o sedt o fo l l o w th e Su n ’ s p at h du ri n g th e d ay , wi t h t h e g o al o f ro t at i n g the l en s es t o m ax im ize t h ei r
ex p os u re t o s o l ar rad iat i o n . Th e l en s es wo u l d co n cen t rat e t h e Su n ’ s ray s o n t o a recei v er t h at wo u l dwarm a “ h eattran sfer fl u i d ”; M r. J o h n s on ex p eri m en t edwi t h
v ari o u s fl u i d s (i ncl u d i n g wat er, m o l t en s al t , an d o i l ) b u tn ev er s et t l edo n an y o n e. Th e fl u i dwo u l db e p u m

pedt o a “ h eatex ch an g er” t hatwo u ldb o i l wat er t o creat e
s t eam . Th e s t eam

wo u l d sp i n a tu rb i n e t h at wo u l d u l t im at el y (i t was h o p ed ) g en erat e el ect ri ci t y . In 2 0 0 6 IAS co n s t ru ct ed1 9 t o wers at a t es t i n g s it e i n Del ta, Ut ah (Del t a
s i te). IAS rep res en t edt o i n v es t o rs th ati two u l di n s tal l o n each t o wer an “ array ” o f t ri an gu l ar-s h ap edFres n el l en s es fo rm edi n to a ci rcl e, l i k e s l i ces o f a p izza p i e. By 2 0 1 5 , h o wev er--t he y ear fo ll o wi n g th e l as tt ax y ear at i ss u e--o n l y o n e o f t h e 1 9- 6
-

[* 6 ] t o wers h adb een equi p p edwi t h a fu l l arrayo f l en s es . So m e l en s es were b ro k en ; th o u s an d s o f o t hers s atu n t o u ch edi n a wareh o u s e. M r. J o h n s o n ’ s p ro ject
n ev er g o tp as tth e R&D s t ag e. Al t h o u g h h i s equ i pm en twas cap ab l e o f g en erat i n g
s m al l am o u n t s o f el ect ri ci t y i n t es t s, i tn ev er cam e cl o s e t o co m m erci al p ro du ct i o n . Des p i t e t h es e fai l u res , M r. J o h n s o n ’ s p ro j ectg en erat edt en s o f m i ll i on s o f d o l l ars i n rev en ue. Th i s rev en u e cam e n o tfro m p ro du ci n g s o l ar p o wer b u tfro m
s el l i n g l en s es t o i n v es t o rs s eek i n g t ax b en efi t s . M r. J o h n s on es t ab li s hedfo r each l en s a p u rch as e p ri ce t hatv as t ly ex ceed edi t s m o d es tp ro duct i on co s t . In v es t o rs
m ad e a d o wnp aym en tequ al t o o n e-t h i rdo f t h e p u rch as e p ri ce; th e b al an ce wo u l d b e du e i f an do n l y

i f t h e l en s es were act u al l y u s edt o p ro duce el ect ri ci t y . Aft er d ev is i n g t h i s p lan , M r. J o h n s o n d i rect edM r. Sh ep ard t o ci rcu l at e
m ark et i n g m at eri al s t o p ro sp ect i v e i n v es to rs . Referri n g t o t h e p l as t i c l en s es as
s o l ar-en erg y

“ s y s tem s , ” M r. Sh ep ard ex p l ai n ed : “ Yo u r o b ject i v e i n p urch as i n g y o u r s y s t em s i s t o zero o u t y o u r t ax es .” To h el p p ro sp ect i v e i n v es t o rs u n d ers t an d h o w t o “ zero o u t” t h ei r t ax es , M r. Sh ep ards upp l i eda l aw fi rm m em o ran du m

o u t l i ni n g t he t ax b en efi t s t h atcan b e d eri v edfro m en erg y cred it s an d d ep reci at i o n d edu ct i o n s .- 7
-

[* 7 ] If p ro s p ect i v e i n v es t o rs ex p res s edi n t eres t , M r. Sh ep ardwo u l d h el p t h em cal cu l at e (b y

rev i ewi ng th ei r t ax reco rd s ) t h e nu m b er o f l en s es th ey wo u l d n eedt o b u y i n a p art i cu l ar y ear t o “ zero o u t ” t h ei r t ax l i ab i l i ty . As h e ex pl ai n ed : Th e RaPo w er3 p ro g ram

i s s etup s o t h atp ro s p ect i v e n ew m em b ers cal cu l at e t h e t ax es th ey

ex p ectt o p ay

i n t h e cu rren t y ear an das an o p t i on ad dth att o wh atth ey p ai di n fed eral t ax es th e p rev io u s y ear. On ce t h i s [i s ] kn o wn , th e co rrect n u m b er o f l en s es t o m ax i m i ze t he t ax b en efi t s can b e p u rch as ed . Th en wh en th e refu n d co m es , y o u h av e en o u g h t o p ay

o ff y o u r l en s es an dp l u s p u t m o n ey i n y o u r p o ck et . Si m

p l e. * * * M es s rs . J o hn s o n an dSh ep ardreco m m en d edacco u n tan t s an dat t o rn ey s wh o co u l d
as s i s t i n v es t o rs wi t h p rep arat i o n o f t ax retu rn s . In ves t o rs wh o s i g n edup were s up p l i edwi t h a l aw fi rm

o p i n i o n th atad dres sedo n ly th e t ax b en efi t s o f t h e t ran s act i on . 3 In 2 0 1 5 th e J u s t i ce Dep art m en tfi l eda ci v il co m p l ai n tag ai n st IAS, RaPo wer, an dM es s rs . J o h ns o n an dSh ep ard , s eek i n g t o en jo i n t h em fro m p ro m o ti n g “ t h e

‘ so l ar en erg y

s ch em e’ * * * o r an y

o t h er [t ax -ev ad i n g ] p l an o r arran g em en t .” Aft er a t wo -week t ri al th e U.S. Di s t ri ct Co u rtfo r t he Di s t ri cto f Ut ah fo u n dth at t h e d efen d an t s h ad co m

m i t t eda “ m as s i v e frau d ” an d (1 ) p erm an en t l y en jo i n ed t h em fro m p ro m o t i n g th e s o l ar en erg y s ch em e, (2 ) o rd eredth em t o d is g o rg e m o re

3 Th e l aw fi rm s ap p aren t l y d i dn o tkn o w th atth ei r d o cu m en t s wo u l db e u s ed t o p ro m ot e t h e s al e o f l en ses , s o th ey s en t M r. J oh n so n ceas e-an d-d es i s tl et t ers . See RaPo wer-3 , LLC, 3 4 3 F. Sup p . 3 dat1 1 6 7
.- 8
-

[* 8 ] th an $ 5 0 m i l l i on , an d(3 ) ap p o i n t eda recei ver t o s ei ze t h ei r as s et s . RaPo wer3 , LLC, 3 4 3 F. Sup p . 3 d1 1 1 5
. Th e Ten t h Ci rcu i taffi rm edthatd eci s i o n i n J u n e 2 0 2 0 . RaPo w er-3 , LLC, 9 6 0 F.3 d 1 2 4 0
. B. Pet i t i o ners ’ In ves tm en ti n th e Sch em e 1
. Back g ro u n d Pres to n Ol s en (M r. Ol s en o r p et i t i o n er) an dEl i zab et h Ol sen are h us b an d
an d wi fe. Pet i t i o ner g rew up i n Ut ah , earn eda B.A. i n eco n o m i cs , an dg radu at ed i n 2 0 0 3 fro m

th e Un iv ers i t y

o f Ch i cag o Law Sch o o l. Aft er p ract i ci n g fo r a y ear i n New Yo rk , h e ret u rn edt o Ut ah t o wo rkfo r Bal l ardSp ah r, LLP. He wo rk edp ri
m ari l y i n th e fi rm ’ s p ub l i c fi n an ce g ro up , ad v i s i n g cl i en t s ab o u tth e t ax as p ect s o f b o n dtran s act i on s . He l at er b ecam e a p artn er atthe fi rm . Aft er ret u rn i n g t o Ut ah , p et i t i o n er reco n n ect edwi t h M r. Sh ep ard ’ s s o n , M at th ew, wh o was h el p i n g h i s fat h er s el l l en s es . In2 0 0 9 M at t h ew i n vi t edp et i
t i on er t o rev i ew p ro m o t i o nal m at eri al s , u rg i n g h i m t o “ [b ] u y o u r s o l ar u n i t s wi t h y o u r t ax m o n ey i n s t eado f g i v in g i taway t o the IRS.” Al t ho u gh th es e t ax b en efi t s were al l u ri n g , p et i t i o ner ex p res s eds o m e s k ep t i ci s m , n o t in g th atas p ect s o f th e d eal

“ s eem [ed ] t o o g o o dt o b e t ru e.” Pet i t i o ner al s o ex p res s edco n cern th ath i s p u rch as e o f l en s es wo u l d“ b e
v i ewed as a p as s i v e i n ves tm en t ,” l ead i ng th e IRS t o d en y d edu ct i o n s an dcred i t s- 9
-

[* 9 ] u n d er t h e “ p as s i v e l o s s ru l es .” See s ec. 4 69 . M r. Sh ep ards u g g es t ed t h atth i s p ro b lem co u l db e o b v iat edb y

creat i n g an LLC an dd es i g n at i ng h i m (M r. Sh ep ard )
as th e LLC’ s rep res en t at i ve. As l o n g as the “ rep res en t at i v e” l o g g eden ou g h h o u rs , p et i t i o n er was s up p os ed l y “ free t o wo rkas l i t t l e * * * as h e wo u l dl i k e i n h i s s o l ar b u s i n es s .” Pet i t i o ner p u rch as ed h i s fi rs tl en s es i n 2 0 0 9 . Fo l l owi n g M r. Sh ep ard ’ s ad
v i ce, h e fo rm edPFO So l ar, LLC (PFO So l ar), o f wh i ch h e was th e s o l e m em b er, t o b e t h e n o m i n al h o l d er o f t h e l en s es . He d i dn otn eg o t i at e o v er t h e p ri ce o f t h e l en s es o r an y

o t h er m at eri al t erm

o f t h e t ran s act i o n . Rat h er, IAS p ro v i d edh i m wi t h a fo rm

co n tract co n t ai n i n g b lan k s fo r h i m t o fi l l i n , e.g ., s p eci fy i n g the n u m b er o f l en s es h e wi s h edt o b u y . He fi l l edi n thatb l an k b y es t i m at i n g h i s t ax l i ab i l
i t y an d t h e n u m

b er o f l en s es h e wo u l dn eedt o zero i t o u t . 2
. Pu rch as e an dLeas e Ag reem en t s OnJ u ly 2 3 , 2 0 09 , p et i t i on er s ig n ed an “ Equ i p m en t Pu rch as e Ag reem en t ” wi t h IAS. He th ereb y

ag reedt o p urch as e $ 60 ,0 0 0 wo rt h o f l en ses , t o wh i ch th e
co n tract referred as “ al t ern at i v e en erg y s y s t em s.” Pet i t i o n er cu t a ch eck fo r t h e $ 1 8 ,0 0 0 d o wnp aym en twh en s i g n i n g th e ag reem en t . Th e $ 42 ,0 0 0 b al an ce was du e i n an n ual i n s t al l m en t s b eg i n n i n g fi v e y ears fro m th e d at e (i f an y ) wh en th e p ro ject b eg an g en erat i ng el ect ri ci t y . Pet i t i o ner h adn o o b l i g at i on t o m ak e an y- 1 0 -

[* 1 0 ] fu rt h er p aym en t s u n l es s t h e l en s es were i n s tal l ed an dp ro du cedel ect ri ci t y at
a s p eci fi edrat e. Th e co n t ract p ro v i d edth atp et i t i on er’ s d o wnp aym en t wo u l db e refu n d edi f IAS fai l edt o “ i n s t al l an d s t artup ” t h e l en s es atth e Del t a s i te b y Decem b er 3 1 , 2 0 0 9 . IAS d i dn o ti n s t al l p et i t io n er’ s l en s es atth e Del ta s it e b y Decem b er 3 1 , 2 0 0 9 (o r s ub s equ en t l y ), an dth e l en s es n ev er p ro du ceden erg y atth e s peci fi ed(o r
an y o t h er) rat e. No n et h el es s , p et i ti o n er d i dn o treq u es ta refu n do f h i s d o wnp ay m en to r o t h erwi s e s eekt o t erm i n at e o r ren eg o t i at e th e ag reem en t . Pet i t i o ner n ev er ex p ect edt o p o s s es s (o r en g ag e i n an y act i v i t y wi t h res p ect t o ) t h e l en s es . To th e co n t rary , th e ag reem en td es i g n at edLTB as th e “ Op erat i o n s
an d M an ag em en tCo m

pan y ,” wi t h n o m i nal res p o n s i b il i t y fo r en s u ri n g th atth e l en s es were i n s t al l edatth e Del t a s it e. LTB was n o ta s i g n at o ry t o t h e ag reem en t . Pet i t i o ner d i dn o tp u rch as e an y l en s es i n 2 0 1 0 b u tcarri edfo rwardt o h i s 2 0 1 0 t ax retu rn h is u n u s edcred i t s fro m 2 0 0 9 . InM ay

2 01 1 M at t h ew urg edp et i
t i on er t o p urch as e m o re l en s es . As an i n cen t iv e h e ex p l ai n edth atM r. J o hn s o n h ad
recen t l y rev i s ed t h e p aym en ts t ru ctu re t o m ak e t h e cas h fl o w ev en m o re co m p el
l i ng : “ Yo un ow o n l y

n eedt o p ay

1 0 % o f t h e d o wn p aym en t * * * [i
. e., 3 % o f t h e
n o m i n al p u rch as e p ri ce] an d t h e res to f t h e d own p aym en ti s n ’ tdu e u n t i l aft er y ou g ety o u r m o n ey b ack fro m th e Dep t . o f Treas u ry .” Al t h o u g h p et i t io n er fo u n d- 1 1 -

[* 1 1 ] th es e t erm s at t ract i v e, h e d ecl i n edt o “ bu y s y s t em s * * * th i s week , ” as M at th ew reco m

m en d ed
. Rat h er, h e d eferred th e p u rch as e t o Decem b er 2 0 1 1 b ecau s e “ wai t [i n g ] u nt i l the en d o f t h e y ear” en ab ledh i m “ t o s ee wh at * * * [h e] t h o u g h t* * * [h i s ] t ax es wo u l db e.” Aft er es ti m at i n g h i s t ax l i ab il i ty fo r 2 0 1 1 , h e
o p t edt o b u y

$ 4 9,0 0 0 wo rt h o f l en s es . Th i s t im e t he ag reem en ti d en t i fi edRaPo wer as th e s el l er, wi t h M r. J o h n s o n
s i gn i n g as th e d i rect o r o f t h e co m p an y . Th e t erm s were s ub st an t i al l y s i m i lar t o t h o s e o f t h e 2 0 0 9 ag reem en tb u trefl ect edth e n ew p aym en t s tru ctu re. Pet it i o n er p ai d$ 1,4 7 0 wh en ex ecu t i ng th e ag reem en ti n Decem b er 2 0 11 an dag reedt o p ay $ 1 3 ,2 3 0 b y

J un e 3 0 , 2 0 1 2 . Th e rem ai n i n g b al an ce o f $ 3 4 ,3 0 0 was t o b e p ai di n
an n ual i n s t al l m en t s b eg i n n i n g fi v e y ears aft er t he d at e (i f an y ) wh en th e p ro ject
s t art edp ro duci n g el ect ri ci t y . Th e ag reem en tp ro v i d ed t h at , i f t h e t ax l aws s ub s equ en tl y ch an gedi n a way

that“ m at eri al l y redu ce[d ] an y t ax b en efi t ,” p et i t io n er
co u ldret ro act i vel y redu ce t h e n u m b er o f l en s es h e p u rch as ed
. Pet i t i o ner co n cu rren tl y

ex ecu t edan “ Op erat i o n an dM ai n ten an ce Ag reem en t .” By

th i s ag reem en th e p u rp o rt edt o l eas e t h e l en s es t o LTB, th e en t i t yreferen cedi n th e 2 0 0 9 co n t ract . Bu twh i l e LTB was d en om i n at edth e “ l es s ee,” t h e ag reem en twas p ri n t edo n RaPo wer l et t erh eadan ds i g n edb y M r. J o h n s on o n b eh al f o f RaPo wer.- 1 2 -

[* 1 2 ] Th e p u rp ort ed l eas e ag reem en tp ro v i dedth atLTB wo u l dp ro v i d e, fo r a fee
o f $ 1 p er y ear, “ a s t ru ctu re t h ath o l d s th e Own er’ s Al t ern at iv e En erg y Sy s t em s [i
. e., th e l en s es ] an da recei ver t o co l l ectthe en erg y .” LTB rep res en t edth at , aft er IAS i n s t al l edth e l en s es o n a t o wer, i two u l d o p erat e an d m ai nt ai n t h e l en s es . In
ex ch an g e LTB ag reedt o p ay p et i t io n er an an n u al ren t al fee o f $ 1 5 0 p er l en s . Bu t
ren tp aym en t s wo u l ds t arto n l y i f an dwh en th e l en s es b eg an p ro du ci n g rev en u e fro m th e g en erat i on o f el ect ri ci t y , an ev en t t h atn ev er o ccu rred . Pet i t i o n er ad m i t t edth ath e n ev er recei v eda s i n g l e ren tp aym en tfro m LTB. No n et h el es s , h e d i d
n o tco ns i d er l eas i n g th e l en s es t o an y o t h er en t i t y b ecau s e h e b el i ev edth atLTB
was “ t h e o n l y

en t i t y th at* * * [h e] h adan o p t i on t o g o wi t h .” Sep arat el y , p et i t i o n er ex ecu t edi n Decem b er 2 0 1 1 a “ Referral Fee Co n t ract ” wi t h RaPo wer. Th is co n t ract --wh ich RaPo wer n eg l ect edt o s i gn --s t at edth atRaPo wer wo u l dp ay p et i t io n er, as a “ b o n us ,” a p ercen tag e o f i t s fi rs tb i l l i on d o l l ars i n g ro s s s al es . M r. Sh ep ardex p l ai n ed t h atth e b o n us p ro g ram “ s h o o t s d o wnth e IRS t h eo ry th aty o ub ecam e i n vo l v edo n l y fo r t h e t ax b en efi t s.” Need l es s t o s ay , p et i
t i on er recei v edn o b o n u s p aym en t s . Pet i t i o ner en t ered i n t o s ub s t an t i al ly i d en t i cal p u rch as e an d l eas e co nt ract s i n 2 0 1 2 , 2 0 1 3 , an d 2 0 1 4. He b ou g h t$ 4 5 ,5 0 0 wo rt h o f l en s es i n 2 0 12 , $ 5 2 ,5 0 0 wo rth
o f l en s es i n 2 0 13 , an d$ 3 5 ,0 0 0 wo rt h o f l en s es i n 2 0 1 4 . Th e ag g reg at e n o m i n al- 1 3 -

[* 1 3 ] p u rch as e p ri ce fo r al l th e l en s es h e acq u i redwas th u s $ 2 42 ,0 0 0 . He m ad e t h e req u i red d o wnp aym en tfo r each y ear’ s s up p l y o f l en s es , b u t h e m ad e n o p ay m en t s t o wardth e b al an ce o f th e n o m i n al p u rch as e p ri ce. Attri al h e ex p lai n edth at h e d o es n o t i n ten dt o p ay the b al an ce b ecau s e “ t he wh o l e th i n g i s fal l i ng ap art .” 3
. Pet i t i o ner’ s Act i v i t i es Du ri n g 2 0 0 9 -2 0 1 4 p et it i o n er s p en tm o s two rk d ay s ad v i s i n g cl i en t s i n h i s b u s y l aw p ract ice. Hi s th en em p l o y er, Bal l ardSp ah r, p ai d h i m an an n ual s al ary
ran g i n g fro m $ 1 4 0,0 0 0 t o $ 1 8 3 ,0 0 0 . In 2 0 1 5 th e fi rm el ev at edh im

t o p art n ers h i p . Pet i t i o ner t es t i fi edth ath e o ccas i o n al l y readem ai l up d at es fro m M r. Sh ep ardt o s t ay

ap p ri s edo f p ro g res s (o r t h e l acko f i t ) atth e Del ta s it e. He ad m i t t ed t h ath e d i d“ n o t [d o ] m

u ch ” wi t h PFO So l ar, t h e LLC th at n o m i n al l y h el dan d l eas edth e l en ses . PFO So l ar d i dn o tm ai n t ai n an y b u si n es s reco rd s , h i re an y
em pl o y ees o r co n t ract ors , o r h av e i t s o wnb an kacco u nt . Pet i ti o ner ch aract eri zed h i s ad m in i s t rat i v e res p o n si b i li ti es as “ ren ewi n g t h e LLC each y ear,” “ m ai nt ai n i n g PDF co p ies o f t h e d o cu m en t s ,” an d“ ju s t t ry in g t o d et erm i n e h o w m an y l en s es t o p u rch as e” t o m ax i m i ze h i s t ax b en efi ts . Pet i t i o ner t es t i fi edth ath e v i s i t edth e Del ta s it e ro u gh l y o nce a cal en d ar qu art er. Bu th e m ai n t ai n edn o trav el l o g s an dd o cu m en t edn o trav el ex p en s es , an d we d i d n o t fi n d hi s t es t i m o n y o n th i s p o i n tcred i bl e. Wh enh e d i dv i s i tthe s i t e, h e- 1 4 -

[* 1 4 ] s aw t o wers an dn u m ero u s p al l et s s t ack edwi t h rect an g u lar p l as t i c s h eet s . He h ad n o way

o f kn o wi n g wh et h er h i s l en s es were i n s t al l edo n a t o wer o r ev en cu t i n t o tri an g u l ar fo rm

an dfram ed . Anem

p l o y ee o f RaPo wer ex p l ai n ed t hat , b ecau s e th e l en s es were “ al l th e s am e” an d“ fu n g i b l e,” t h e l en s es p et i t i o ner h ad p u rch as edco u ldn o t b e i d en t ifi ed . Pet it i on er n ev er o b s erv eda l en s p ro du ce el ect ri ci ty . In 2 0 1 1 , n earl y

two y ears aft er p u rch as i n g $ 6 0,0 0 0 i n l en s es , p et i t i o ner
as k edM r. Sh ep ardt o ex p lai n th e “ n u t s an db ol t s ” o f t he p ro ject . Pet it i on er ackn o wl ed g edth at“p eo p l e as km e wh ati ti s s p eci fi cal l y th atthey wi ll b e p u rch as i n g
an d I d on ’ tkno w.” He l at er rel ay edco n cern s t o h i s s i s ter, s t at i n g t h atth e s o l ar equ ip m en t“ l o o k s a l i t tl e l i ke ju n k .” Bu t d es p i t e s k ep ti ci s m ab o u tth e p ro ject , p et i ti o n er co n t i n u edt o p urch as e l en s es b ecau s e “ i t was a way t hat* * * [h e] co u l d
u s e a t ax l i ab i l it y ” t o h i s ad v an t ag e. Al t h o u g h h e n ev er s aw h is l en s es i n o p erat i on , h e cl ai m edd edu ct i on s an dcred i t s an n u al ly o n t h e b as i s o f l et t ers h e recei v ed fro m IAS an dRaPo wer. Th o s e l et t ers as sert edth at h i s l en s es were “ p u ti n t o s erv i ce,” t hereb y qu al ify i ng h im fo r a “ s o l ar en erg y

t ax cred i t .” C. Tax Fi l i n gs an dIRS Ex am i n at i o n Fo r 2 0 0 9 p et it i o n ers t i m el y fi l eda jo in tFed eral i n co m e t ax retu rn th atwas p rep aredb y

Bry an Bo l an d er, a cert i fi edp ub l i c acco un t an twh o h adp rep aredre-- 1 5 -

[* 1 5 ] tu rn s fo r o t her l en s p urch as ers . On t h atretu rn th ey rep o rt ed wag es o f $ 1 4 0 ,4 4 3 b u tt o t al t ax o f zero . Onth e Sch edu l e C t h ey i den t i fi edPFO So l ar as a

“ s o l ar en erg y ” b u s i n es s an dcl ai m ed$ 30 ,6 0 0 i n d ep reci at i o n ex p en s e o n t he l en s es . Th ey

rep o rt edn o i n co m e an d n o o th er ex p en s es o n th e Sch edu l e C. Th ey at t ach eda Fo rm

3 8 00 cl ai m i n g an en erg y cred i t o f $ 1 8 ,0 0 0 , co m

pu t edas 3 0 % o f t h e l en s es ’ n o m i n al p u rch as e p ri ce ($ 6 0 ,0 00 ). Th ey ch aract eri zedthe l en s es as

“ p ro p ert y u s i n g * * * s o l ar en erg y

p l aced i n s erv i ce du ri n g th e t ax y ear” an das el i g i b l e fo r t h e cred i t fo r t h atreas on . Th ei r al lo wab l e cred i tfo r 2 0 0 9 was l i m i t ed t o $ 4 ,6 2 9 , l eav i ng th e $ 1 3 ,3 7 1 b al an ce t o b e carri ed t o 2 0 1 0 . Pet i t io n ers th u s el i m i n at edth ei r i nco m e t ax l i ab i l i t y fo r 2 0 0 9 an d s o u gh t a refu ndo f $ 2 1 , 2 45
. M r. Bo l an d er al so p rep aredp et i t io n ers ’ retu rnfo r 2 0 1 0. Onthatretu rn th ey rep o rt edwag es o f $ 1 4 5 ,5 18 b u tt o t al t ax o f zero . Onth e Sch edu l e C t h ey i d en t i fi edPFO So l ar as a “ s ol ar en erg y ” b u s in es s an dcl ai m ed$ 8 ,1 6 0 i n d ep reci at i o n
ex p en s e o n th e l en s es . Th ey rep o rt edn o i n co m e o n t h e Sch edu le C an dn o o t h er
ex p en s es ap artfro m

$ 42 5 fo r l eg al an dp ro fes s i o nal fees
. Th ey carri edfo rward an
en erg y cred i t o f $ 1 0,3 0 6 fro m 2 0 0 9 , l eav in g a b al an ce t o b e carri edt o 2 0 1 1 . Pet i ti o n ers th u s el im i nat edth ei r i n co m e t ax l i ab i li t y fo r 2 0 1 0 an ds o u g h t a refu n do f $ 2 0 ,1 9 1
.- 1 6 -

[* 1 6 ] M r. Bo l an d er p rep aredp et i t i o n ers ’ retu rn fo r 2 0 1 1 as wel l . Onth atretu rn t h ey rep o rt edwag es o f $ 1 6 1 ,4 7 4 b u tt o tal t ax o f zero . Onth e Sch edu l e C t h ey i d en t i fi edPFO So l ar as a “ so l ar en erg y ” b u s i n es s an dcl ai m ed$ 46 ,5 4 6 i n d ep reci at io n ex p en s e o n th e l en s es . Th ey rep o rt edn o i n co m e o n t he Sch edu l e C an dn o
o t h er ex p en s es ap artfro m $ 3 2 5 i n l eg al an dp ro fes s i o n al fees . Th ey at t ach eda Fo rm 3 8 0 0 cl ai m i n g an en erg y cred i to f $ 14 ,7 0 0 , co m

p u tedas 3 0 % o f t h e n o m i n al p u rch as e p ri ce ($ 49 ,0 00 ) o f t h e l en s es p urch as edi n 2 01 1 . Th ei r al l o wab l e cred i t fo r 2 0 1 1 was l i m i t edt o $ 7 ,5 3 1 , l eav i n g t h e b al an ce t o b e carri ed t o 2 0 1 2 . Pet i
t i on ers th u s el i m i n at edthei r i n co m e t ax l i ab il i ty fo r 2 0 1 1 an d s o u gh t a refu n do f $ 2 4 ,8 6 2
. M r. Bo l an d er d ecl i n edt o p rep are p et i ti o n ers ’ return fo r 2 0 1 2 , ev i d en t l y b ecau s e IRS au d itact iv i t y

h adb eg u n t o h eat up. Th e p ro m o ters referred M r. Ol s en t o a d i fferen tacco u n tan t , Ken n et h B. Ri t er, wh o p i ck edup wh ere M r. Bo l an d er h ad l efto ff. Onthei r 2 0 1 2 ret u rn p et i t i o n ers rep o rt edwag es o f $ 1 7 3 ,4 3 9 b u tt o t al t ax o f zero
. On t h e Sch edu l e C t h ey i d en t i fi edPFO So lar as a “ s o l ar en erg y ” b u s in es s an dcl ai m ed$ 23 ,2 4 2 i n d ep reci at i o n ex p en se o n th e l en s es . Th ey rep o rt ed n o i n co m e an d n o o t h er ex p en ses o n th e Sch edu l e C. Th ey at t ach eda Fo rm

3 8 0 0 cl ai m i ng an en erg y

cred it o f $ 13 ,6 5 0 , co m

p u t edas 3 0 % o f t h e n o m i nal p u rch as e p ri ce ($ 4 5 ,5 0 0 ) o f t h e l en s es p u rch as edi n 2 0 12 . Th ey cl ai m edan al lo w ab l e cred i t- 1 7 -

[* 1 7 ] o f $ 1 9 ,1 36 (i n cl ud i n g a carry o v er). Pet i t i o n ers th us el i m i n at edth ei r i n co m e t ax l i ab i l i t y

fo r 2 0 1 2 an ds o u g hta refu n do f $ 2 7,6 9 5
. In 2 0 1 3 RaPo wer referred p et i t i on ers t o a d i fferen tretu rn p rep arer, Ri ch ard J am es o n , wh o p rep aredthei r retu rn s fo r 2 0 13 an d2 0 14 . Onth ei r 2 0 1 3 retu rn th ey rep o rt edwag es o f $ 1 8 1 ,4 08 b u tt o t al t ax o f zero . OnM r. J am es o n ’ s ad v i ce, t h ey ch an gedth ei r Sch edu l e C d es cri p t io n o f PFO So lar’ s b u s i n es s fro m “ s o l ar en erg y ” t o “ equ i p m en tren t al s erv i ces .” Th ey cl ai m ed$ 3 3 , 7 1 5 i n d ep reci at i o n ex p en s e o n t h e l en s es b u t rep o rt edn o i nco m e an dn o o t h er ex p en s es o n th e Sch edu l e C. Th ey at t ach eda Fo rm

3 8 00 cl ai m i n g an en erg y cred i t o f $ 1 5 ,7 5 0 , co m

pu t edas 3 0 % o f t h e n o m i nal p u rch as e p ri ce ($ 5 2 ,5 0 0 ) o f t h e l en s es p urch as edi n 2 0 1 3 . Th ey cl ai m edan al l owab l e cred i to f $ 1 6 ,5 4 0 (i n cl u d i ng a carry o v er). Pet it i o n ers th u s el i m i n at edth ei r i nco m e t ax l i ab i l i t y fo r 2 0 1 3 an d s o u gh t a refu ndo f $ 2 9 , 3 01
. Onth ei r 2 0 1 4 ret u rnp et i t i o n ers rep o rt edwag es o f $ 1 8 3,3 4 4 an d t o t al t ax o f $ 1 ,5 3 8 . Onth e Sch edu le C t h ey ag ai n i d en t i fi ed PFO So l ar’ s b u s i n es s as “ equ i p m en tren t al s erv i ces ” an d cl ai m ed$ 2 9 ,9 7 5 i n d ep reci at i o n ex p en s e o n th e l en s es . Th ey rep o rt edn o i n co m e an dn o o t h er ex p en s es o n th e Sch edu l e C. Th ey at t ach ed a Fo rm 3 8 0 0 cl ai m i n g an en erg y cred i to f $ 1 0 ,5 00 , co m

p u t ed as 3 0 % o f th e n o m i n al p u rch as e p ri ce ($ 35 , 0 0 0 ) o f t h e l en s es p u rch as edi n 2 0 1 4. Th ey cl ai m edan- 1 8 -

[* 1 8 ] al l o wab l e cred i to f $ 1 1 ,5 8 1 (i n cl u di n g a carry o v er). Pet i t i o n ers th u s redu cedt o $ 1,5 3 8 th ei r i n co m e t ax l i ab i l i t y fo r 2 0 1 4 an ds o ug h ta refu n do f $ 2 7 ,9 7 3. Fo r each y ear p et it i on ers rep o rt edth ei r l en s -rel at edd edu ct i o ns an dcred i t s
o n th e b as i s o f “ p laced i n s erv i ce” l et t ers recei v edfro m IAS o r RaPo w er. Th es e l et t ers , s i g nedb y

M r. J o h n so n o r M r. Sh ep ard , s t at ed t h atth e l en ses h adb een “p u t i n t o s erv i ce” i n Decem

b er o f each y ear, t hereb y

qu al i fy i ng p et i ti o n ers fo r d ep reci at io n d edu ct io n s an den erg y cred i t s . M r. Ol s en d i dn otqu es ti o n th e accu racyo f t h es e l et t ers ev en th o ug h h e h adn ev er act u al ly s een o n e o f h i s l en s es o n a t o wer. In 2 0 1 2 M r. J o h n s o n ’ s s ch em e b ecam e t h e s ub jecto f an IRS t ax s h el t er i n v es t i gat io n . As p arto f t h i s i n v es t i gat i o n th e IRS s el ect ed p et i t i o n ers ’ 2 0 1 0 -2 0 1 4 retu rn s fo r ex am i nat i o n . Wh en p et i t i o n er an do t h er p u rch as ers n ot i fi edM r. Sh ep ardth atth ei r retu rn s were u n d er au d i t, h e s u gg es t edd et ai l edarg u m en ts fo r t h em t o m ak e an dd o cu m en t s t o s ub m i tt o th e IRS. He rep eat ed l y as s u redp u rch as ers
n o tt o wo rry , s tat i n g t h at“ [w] e h av e t h e t ax co d e o n o u r s id e.” Fo l l owi n g i t s ex am i n at i o n th e IRS d et erm i n edth atp et i t i o n ers were en t i t l ed t o n o d ep reci at i on d edu ct i o n s o r en erg y t ax cred i t s fo r an y y ear an dth at t h ey h ad fai l edt o s ub s t an t i at e t h e d edu ct i o n s fo r l eg al an d p ro fes s i o n al fees cl ai m edo n t h ei r Sch edu l es C fo r 2 0 1 0 an d2 0 11 . (Pet i t i o n ers h av e co n ced edth atth ey can n o t
s ub s t an t i at e t h e l at ter d edu ct io n s .) In J u l y 2 0 1 4 an d J ul y 2 0 1 6 th e IRS i s s ued- 1 9 -

[* 1 9 ] p et i t i o n ers t i m el y

n ot i ces o f d efi ci en cy

fo r 2 0 1 0 -2 0 1 2 an d2 0 1 3 -2 0 14 , res p ect i vel y . Th e n o ti ces ex pl ai n edth atth e IRS h add i s al l o wedal l l en s -rel at ed d educt i o n s an dcred i t s b ecau s e th e l en s es were n o tu s edi n a t rad e o r b us i n es s , h el dfo r t h e p ro du ct i on o f i nco m e, o r p l aced i n s erv i ce du ri n g th e rel ev an t t ax y ear. Pet i t io n ers t i m el y

p et it i o n ed wi t h reg ardt o each n o t ice. D. Ex p ertTes t i m o n y Attri al res po n d en t p res en t edt es t i m o n y fro m Th om as M an ci n i , wh o m we
reco g n izedas an ex p erti n co n cen t rat eds o l ar p o wer. Dr. M an ci ni earn eda Ph .D. i n m ech an ical en g i n eeri ng fro m Co l orad o St at e Un i vers i t y . He wo rk ed fo r m o re t h an 2 0 y ears at San d i a Nat i o n al Lab o rat o ri es , wh ere h e m an ag ed t he Go v ern m en t ’ s co n cen t rat eds o l ar p o wer p ro g ram . He n o w ru n s a co n s ul t i n g b u s i nes s th at ad v is es cl i en t s i n t h e s ol ar en erg y i n du s t ry . He h as b een reco g n izedas an ex p ert i n atl eas tfo ur cas es i nv ol v i n g s o l ar en erg y . See, e.g ., RaPo wer-3 , LLC, 3 4 3 F. Sup p . 3 d1 1 15
. Dr. M an ci n i v i s i t edth e Del t a s i t e t w i ce t o ev al u at e M r. J o h n s o n ’ s t ech n o l
o g y an dd et erm in e wh et her i tco u l dp ro du ce el ect ri ci ty . He m etwi th M r. J o h n s on
an d rev i ewedm at eri al s h e s up p l i ed . Th o s e m at eri al s , Dr. M an ci n i d i s co v ered , co n tai n ed“ n o t es t s , n o t es trep o rt s , [an d ] n o d o cu m en t at i o n o f an y ty pe.” Dr. M an ci n i fo u nd“ n o i n fo rm at i on th atev en i n di cat edth atal l th e[] co m p o n en t s h av e- 2 0 -

[* 2 0 ] b een as s em

b l edi n t o a s y s t em

t o p ro du ce el ect ri ci t y .” Dr. M an ci ni was p u zzl ed th at , aft er 1 7 y ears , IAS s t i l l “ d i dn ’ tkn o w wh at t h ey were d ev el o pi n g .” Wh en Dr. M an ci n i t o u redth e Del t a s i t e, h e s aw i n d i vi du al co m p o n en t s (e.g ., l en s es , recei vers , an d co n cen t rat o rs ) t h atM r. J o h ns o n p ro p o s edt o u s e i n h i s
s y s t em . Bu tDr. M an ci ni o p i n edth atth es e co m po n en tp art s were “ no td es ig n edt o
wo rkt o g et h er, an d d o n otwo rkt og et h er” i n an y o perat io n al s en s e. He d i dn o ts ee
a s i n g l e co ncen t rat or “ i n wo rk in g o rd er.” “No ne o f t he l en s as s em b l ies were fu l l y p o p u l at edwi t h l en s es ” an d “ m o s to f t h e l en s es thatwere o n th e co n cen t rat o rs were b ro k en .” He fo u n dth e g ro u n dl i t t ered wi t h b ro k en l en s es an d s aw el ect ri cal wi res
s o ak edi n “p o o l s o f wat er.” He d es cri b edth e s i t e as “ d i rt y an dd i so rg an ized ,” wi t h
n o ev i den ce t h ati t h ad “ b een recen t l y u s ed fo r an y

t es tact iv i t y an dcert ai n l y n o tt o g en erat e el ect ri ci t y . ” Fo l l owi n g ex am in at i o n o f al l t h e ev id en ce, Dr. M an ci n i o pi n ed t hatth e

“ IAS So l ar Di s h Tech n o l o g y d o es n o tp ro du ce el ect ri ci t y o r o t h er u s eab le en erg y fro m th e s u n .” An dh e co n cl u d edth atth e t ech n o l og y was n o tan dwo ul dn ev er b e

“ a co m m erci al -g rad e d i sh s o l ar s y s tem .” Pet i t i o ners p res en tedt es t i m o n y fro m Ken Gard n er, wh o m

we reco g n i zedas
an ex pert i n s o l ar p ower wi t h a p art i cu l ar co n cen t rat io n i n p h o to v o l t ai c p ro ject s . M r. Gard n er t es t i fi edth ath e t ou redth e Del ta s i t e i n 2 01 5
. He al s o s aw b ro k en- 2 1 -

[* 2 1 ] l en s es an dd eb ri s o n th e g ro u n dan do b s erv edth at o n ly o ne o f t he 1 9 t o wers h ad a “ fu l l arrayo f l en s es .” A “ fu ll array ,” h e s ai d , requ i redab o ut7 0 t ri an g u l ar
s l ices . As h e ack n o wl ed g ed , th i s m ean tth at“ t h o u s an d s o f l en ses h adn o tb een i n s t al l ed .” M r. Gard n er o p in edth atM r. J o h n s o n ’ s s y s t em was “ t ech n ical l y

v i ab l e t o g en erat e el ect ri ci t y , ” b uth e ack n o wl ed g edth ath e d idn o t actu al l y o b s erv e an y el ect ri ci ty b ei n g p ro du ced . He t es t ifi edth atM r. J oh n so n “ act i vat edth e s y s t em ” fo r a 3 0 -m i n u t e p eri o d , b u tth e s y s t em “ was n’ tco n n ect edt o an yt h i n g ” an d“ was n ’ t p u t t i ng an yt hi ng o n th e [el ect ri c] g ri d .” Ho wev er, h e s ai dh e was i m p res s edb y M r. J o h n s o n ’ s “ creat i v i t y . ” OPINION I. Bu rd en o f Pro o f Th e IRS’ d et erm i n at i o ns i n a n o t i ce o f d efi ci en cy are g en eral l y

p res u m ed
co rrect , an dt ax pay ers b ear t h e b u rd eno f p ro vi n g t h em erro n eo u s . See Ru l e 1 4 2 (a). Dedu ct i o n s an dcred i t s are a m at ter o f l eg i s l at i v e g race, an dt ax pay ers
m u stp ro ve en ti t l em en tt o al l d edu ct i o n s an d cred i t s cl ai m ed . See i b i d .; INDOPCO, In c. v . Co m

m i s s i o n er, 5 03 U.S. 7 9 , 8 4 (1 9 9 2). Tax p ay ers are req u i redt o i d en t i fy each d edu ct io n an dcred i t , s h o w th atth ey h av e m etal l rel ev an treq u i re-- 2 2 -

[* 2 2 ] m en ts , an d k eep b o ok s o r reco rd s t o s ub s t an t iat e t h e am o un t s cl ai m ed . See
s ec. 6 0 01 ; s ec. 1 .6 0 0 1 -1 (a), In co m e Tax Reg s . Un d er cert ai n ci rcu m s t an ces th e b u rd en o f p ro of o n fact ual i s su es m ay s h i ft t o res p o n d en t . See s ec. 7 4 9 1 (a). Bu t p et i t io n ers i n tro du ced l i t t l e (i f an y ) “ cred i b l e
ev i d en ce,” an dth ey

d i dn ot“ m ai n t ai n[] al l reco rd s req ui red ” b y th e Co d e. See
s ec. 7 4 91 (a)(1 ), (2 )(B). Th ey th u s b ear t h e b urd en o f p ro o f o n al l i s s u es . 4 II. Pet i t i o ners ’ En t it l em en tt o Dedu ct i o n s an d Cred i ts A. Go v ern in g Leg al Pri n ci p les Fo r 2 0 1 0-2 01 4 p et i t i o ners cl ai m eds ub s t an t i al d ep reci at i o n d edu ct i o n s an d

“ en erg y cred i t s ,” wh ich are al l o wab le as i nv es t m en tcred it s u n der s ect i o ns 4 6 (2 )
an d 4 8 (a). Sect i o n 1 6 7(a) al l o ws as a d ep reci at i o n d edu ct i o n a reas o nab l e al l o wan ce fo r t h e ex h au s t i on an dwear an dt ear o f “p ro p ert y u s edi n th e [t ax p ay er’ s ] t rad e o r b u si n es s , o r * * * o f p ro p ert y h el dfo r t h e p ro duct i o n o f i n co m e.” If t h e

4 Pet i t i on ers co n t en d t h atres p o n d en t b ears th e b u rd eno f p ro o f o n th e qu es t i on wh et h er p et i t i o n ers “p art i ci p at edi n an ab u s i v e t ax av oi d an ce s ch em e” b ecau s e t h i s qu es t io n rai s es a “ n ew m at t er.” See Ru l e 1 4 2 (a)(1 ). Pet it i o n ers m i s ap p reh en d res p o n d en t ’ s p o s i t i o n . Res p o n d en td o es n o tco nt en d t h atp et it i on ers are al l o wed no d edu ct i o n s o r cred i t s b ecau s e o f an y ab u si v e b eh av i o r. Res p o n d en t ’ s p o s i t i on attri al an do n b ri ef i s t h atp et i t i o ners are al l o wedn o d edu ct i o n s o r cred i t s b ecau s e th ei r l en ses were n otu s edi n a t rad e o r b u si n es s , h el dfo r t h e p ro du ct i o n o f i n co m e, o r p laced i n s erv i ce. Th i s p os i t i o n i s i d en t i cal t o th e d et erm i n at i o n s m ad e i n t h e n o t i ces o f d efi ci en cy .- 2 3 -

[* 2 3 ] t ax p ay er d o es n o tu s e t h e p ro p ert y fo r ei th er o f t h es e p u rp o s es , th e p ro p ert y i s n o td ep reci ab l e. Sect io n 4 8 al l o ws an “ en erg y cred it ” eq u al t o 3 0 % o f t h e t ax p ay er’ s b as i s i n cert ai n “ en erg y

p ro pert y ,” d efi n ed t o i n cl u d e “ equi p m en twh i ch u ses s o l ar en erg y t o g en erat e el ect ri ci t y .” Sec. 4 8 (a)(1 ), (2 )(A)(i ), (3 )(A)(i ). Ho wev er, p ro p ert y qu al i fi es as “ en erg y

p ro p ert y ” o n l y

i f (am on g o t h er t h i n g s ) i t i s p ro p ert y “ wi t h res p ectt o wh i ch d ep reci at i o n (o r am o rt i zat i o n i n l i eu o f d ep reci at io n ) i s al lo wab l e.” Sec. 4 8 (a)(3 )(C). If n o d ep reci at i o n i s al l o wab l e du ri ng th e y ear i n qu es t i on , th e p ro p erty can n o tco n s t i tu t e “ en erg y p ro p ert y .”

“ Th e p eri odfo r d ep reci at i o n o f an as s ets h al l b eg i n wh enth e as s eti s p l aced i n s erv i ce.” Sec. 1 .1 6 7 (a)-1 0 (b ), In co m e Tax Reg s . Th e en erg y cred i t i s l i k ewi se
av ai l ab l e o n l y

wi t h res p ectt o “ en erg y

p ro pert y p l aced i n s erv i ce du ri n g s u ch t ax ab l e y ear.” Sec. 4 8 (a)(1 ). Th u s , as s u m i ng th at t h e t ax p ay er u s es p ro p ert y i n h i s t rad e o r b u si n es s o r h o ld s i tfo r p ro du ct io n o f i n co m e, t h e p ro p ert y qu al i fi es fo r d ep reci at i o n d edu ct i o n s an den erg y cred i t s o n l y

i f i th as b een “p l aced i n s erv i ce.” Sect io n 4 6 9 (a) p ro v i d es , i n th e cas e o f an i n d i v i du al , th at n ei t h er “ t he p as s i ve act i v i t y l o s s ” n o r “ t h e p as s i v e act i v i t y cred i t” s h al l b e al l o wedfo r an y y ear. A “p as si v e act iv i t y ” i n cl u des an y act i v i ty “ i n wh i ch t h e t ax p ay er d o es n o tm at eri
al l y p art i ci p at e” an d g en eral ly i n cl u d es “ an y

ren t al act i v it y .” Sec. 4 69 (c)(1 )- 2 4 -

[* 2 4 ] an d (2 ). A t ax pay er i s treat edas “ m at eri al l y p art i ci p at i ng ” i n an act i v i t y
o n l y i f h e i s i n vo l v edi n i ts o p erat i o n s o n a b as i s t h at i s “ reg u l ar,” “ co n ti n uo u s ,”
an d “ s ub st an ti al .” Sec. 4 6 9 (h )(1 ). B. Trad e o r Bu s i n es s Th e fi rs tqu es t i o n i s wh et h er M r. Ol s en en gag edi n a “ t rad e o r b u s i n es s ” wi t h res p ect t o th e l en s es h e p u rch as ed . “ [T] o b e en g ag edi n a t rad e o r b us i n es s, t h e t ax p ay er m

u stb e i nv o l v ed i n th e act i v it y wi t h co nt i n u i ty

an dreg u l ari t y

an d
* * * t he t ax p ay er’ s p ri m ary p urp o s e fo r en g ag i n g i n th e act i v i t y m u s tb e fo r i n co m e o r p ro fi t .” Co m

m i s si o n er v . Gro et zi ng er, 4 8 0 U.S. 2 3 , 3 5 (1 9 8 7 ). To s at i s fy t h e “ trad e o r b u si n es s ” req u i rem en t , th e t ax p ay er m u s t s h o w ex ten s i v e b u s i n es s act i vi t y o v er a s ub s t an t i al p eri o d . See Sn y d er v . Un i t ed St at es , 6 7 4 F.2 d1 3 5 9 , 1 3 6 4 (1 0 t h Ci r. 1 9 8 2 ). Sp o rad i c act i vi t i es d o n o t ri s e t o th e l ev el o f a “ t rad e o r b u s i n es s .” See Co m

m i s s io ner v . Gro et zi n g er, 4 8 0 U.S. at3 5 . An dm an ag i n g
o n e’ s o wni n v es t m en t s d o es n o tco n s t i tu t e a “ t rad e o r b u s i n es s.” See Hi g gi n s v . Co m m i s s i o n er, 3 1 2 U.S. 2 1 2 , 2 1 6 (1 9 4 1). Det erm i ni n g wh et h er a t ax p ay er i s en g ag edi n a “ t rad e o r b u s i n es s ” requ ires th atwe ex am i n e al l the fact s i n the cas e. Id . at2 1 7
.- 2 5 -

[* 2 5 ] 1
. Pu rp o rt edSo l ar En erg y Bu s i nes s Onh i s Sch edu l es C fo r 2 0 1 0 -2 0 1 2 M r. Ol s en cl ai m edth ath e en g ag edi n a

“ s o l ar en erg y ” b u s i n es s . Bu th e d idn o tp os s es s th e s k i l l s , edu cat i o n, o r ex p eri
en ce t o co n du cts u ch a b u s in es s . An dp et it i on ers wh ol l y fai l edt o es t ab l i sh th ath e
en g ag edi n an y

s u ch b u si n es s o n a reg u l ar, co nt i n uo u s, an dact i v e b as i s . Hi s act i v i t ies co n s i s t edal m o s tex cl u si v el y o f wri t i n g ch eck s t o IAS an d RaPo wer, s i g n i n g a few fo rm d o cu m en t s each y ear, an den g ag i n g i n em ai l co rres p on d en ce wi t h th e p ro m o t ers o f t he t ax s h el t er. M r. Ol s en k ep tn o b u s i n es s reco rd s , recei v edn o g ro s s i n co m e, an drep o rt ed n o ex p en s es ap artfro m d ep reci at i o n (p l u s l eg al fees h e
co n ced edh e co u l dn o ts ubs t an t i at e). AtM r. Sh ep ard ’ s s u g g es t i o n , M r. Ol s en fo rm edan LLC t o creat e th e ap p earan ce o f a t rad e o r b u s i n es s , b u th e s upp l i edn o ev i d en ce t hath e u s edth e LLC t o co n du ctan y

b u s in es s act i v i t y . PFO So lar h adn o b u s i n es s reco rd s o r em p l o y ees
an d d i d n o tev en m ai n t ai n i t s o wn b an kacco u nt . Wh en p res s edo n wh ath e act u al l y d idwi t h PFO So l ar each y ear, h e an s wered“ n o tm u ch .” He d es cri bedh i s res p o n si b i l i t i es as “ ren ewi n g t h e LLC each y ear,” “ m ai n tai n i n g PDF co p i es o f t h e d o cu m en t s ,” an d“

ju s ttry i n g t o d et erm i ne h o w m an y l en ses t o p u rch as e.” In d eed , M r. Sh ep ardp i t ch edth e LLC t o h i m o n th e t h eo ry

th ath e wo u l db e “ free t o wo rk
as l i t t l e * * * as h e wo u l dl i k e i n h i s s o l ar b u s in es s .”- 2 6 -

[* 2 6 ] M r. Ol s enp u rch as edl en s es fro m IAS an dRaPo w er, b u t h e d i dn o tu s e t h e l en s es t o co n du ctan y

b u s in es s act i v i t y . He s ig n ed d o cu m en t s b y wh i ch h e p u rp o rt edt o l eas e t h e l en ses t o LTB, anen t i t y co n t ro ll ed b y

M r. J o h n s o n . Th o s e d o cu m en t s s t at edth atLTB wo u l dm an ag e an d m ai n tai n th e l en s es , l eav i n g M r. Ol s en wi th n o th in g t o d o . Th e p ro s p ect o f recei v i n g p ro fi t s was th u s o u to f h i s h an ds co m

p l et el y : An y s ucces s wo u l dd eri ve “ n otfro m h i s o wntrad e o r b u s i n es s b u tfro m th ato f” IAS an dLTB. See Wh i pp l e v . Co m m i s s i o n er, 3 7 3 U.S. 1 9 3 , 2 0 2 (1 9 6 3). M r. Ol s enap paren t l y

v i s i t ed t h e Del t a s i t e a few t i m es . Bu th e n ev er s aw
o n e o f h i s l en s es (o r an y

l en s ) g en erat e el ect ri ci t y . In d eed , h e co ul dn o tes t ab l i s h t h ath e h adev er s een h i s l en s es atal l
. Th ere i s n o ev i den ce th ath i s l en s es were i n s t al l edo n a t ower o r ev en u nl o ad edfro m a p al l et . In 2 0 1 1 , n earl y

two y ears aft er p u rch as i n g $ 6 0,0 0 0 i n l en s es , M r. Ol s en
as k edM r. Sh ep ardt o ex p lai n th e “ n u t s an db ol t s ” o f t he p ro ject . He ad m i tt edth at

“ p eo p l e as km e wh ati t i s s p eci fi cal l y th at t h ey wi l l b e p u rch as i n g an dI d o n ’ t kn o w.” He l at er rel ay edco n cern s t o h i s s i s t er, s t at i n g th at t h e s o l ar eq u i p m en t

“ l o ok s a l i t t l e l i k e ju nk .” Th es e are n otth e o b s erv at i o n s o f s o m eo n e en g ag edwi t h
co n ti n u i t y

an d reg u l ari t y

i n a g en u i n e t rad e o r b u si n es s .- 2 7 -

[* 2 7 ] Des p i t e h i s co n cern s M r. Ol s en co n t i n u edt o p urch as e l en s es b ecau s e “ i t
was a way

th at* * * [h e] co u l du s e a t ax l i ab i l i t y ” t o h i s ad v an t ag e. To b e co n du ct i n g a t rad e o r b u s i n es s “ th e t ax p ay er’ s p ri m ary p u rp o s e fo r en g ag i ng i n th e act i vi t y m u s t b e fo r i nco m e o r p ro fi t .” Co m m i s si on er v . Gro et zi n g er, 4 8 0 U.S. at3 5 . “ ‘ [P] ro fi t ’ m ean s eco n o m i c p ro fi t , i n d ep en d en to f t ax s av i n gs .” Su rl o ff v
. Co m m i s s i o n er, 8 1 T.C. 2 10 , 2 3 3 (1 9 8 3 ). W e fi n dth atM r. Ol s en ’ s p ri m ary p u rp os e i n p u rch as in g l en s es was t o b en efi tfro m t ax s av i ng s , n o tt o d eri v e p ro fi t fro m th e co n ducto f a g en ui n e b u s in es s en terp ri s e. 5 2
. Equ i p m en t Ren t al Serv i ces Bu s i n es s Onh i s Sch edu l es C fo r 2 0 1 3 an d 2 0 1 4 M r. Ol s en cl ai m edth at h e en g ag ed i n an “ equ i p m en tren t al s erv i ces ” b u s in es s . He co nt en d s t h ath e b eg an h i s ren t al b u s i n es s i n 2 0 1 1 b y

en t eri n g i n t o wh at was b as i cal l y a s al e-an d -l eas eb acktran s act i on . Aft er h e ag reedt o p u rch as e l en s es , M r. J o h n s o n p res en t edh i m wi th p redraft edp u rch as e an dl eas e ag reem en t s . Bo t h d o cu m en ts were p ri n t edo n RaPo wer l et t erh eadan ds i g n edb y

M r. J oh n s o n .

5 M r. Ol s en ’ s p art i ci p at i o n i n th e “ b o n u s p ro g ram ” d oes n o t ev i d en ce a p ro fi t m o ti v e. Th e n o t i on th atRaPo w er wo u l d ev er earn a b i l l i o n d o l l ars i n rev en u e was far fet ch ed , t o s ay

the l eas t . In d eed , M r. Sh ep ardex p l ai n edth atRaPo wer creat ed t h e p ro g ram

t o “ s h o o t [] d o wnth e IRS t h eo ry th aty o u b ecam e i n v o lv edo n l y fo r t h e t ax b en efi ts .”- 2 8 -

[* 2 8 ] Th e an n u al l eas e ag reem en t s p ro v i d edth atLTB--an en t i t y t h atM r. J o h n s o n
co n tro l l ed , b u twh i ch d i dn ots i g n th e co n t ract --wo u l d l eas e each l en s fo r $ 1 5 0 p er y ear. Bu tLTB n ev er m ad e a ren tp aym en tb ecau se i ts p aym en to b l ig at io n aro s e
o n l y i f th e l en s es p ro duced rev en u e--a co n d it i o n th atn ev er o ccu rredan dwas en t i rel y o u to f p et it i on er’ s co nt ro l i n an y ev en t . Fo r t h e t ax y ears ati s s u e M r. Ol s en
was es s en t i al l y

l eas i ng th e l en s es t o M r. J o h n s on ’ s affi l i at es fo r free. Pet i t i o n er wh o l l y fai l edt o es t ab l i s h t h ath i s “p ri m ary p u rp o s e fo r en g ag i n g i n t h[i s ] act i v i t y
* * * [was ] fo r i nco m e o r p ro fi t .” Co m m i s si on er v . Gro et zi n g er, 4 8 0 U.S. at3 5
. Th ere i s l i k ewi s e n o ev i d en ce th atM r. Ol s en en g ag edi n ren t al act i v i t y wi t h

“ co n t i n ui t y

an dreg u lari ty .” Ib i d . He d i dn otad v ert i s e o r p ro m o t e h i s s up p o s ed
ren t al b u s i n es s an d d i dn o ts eek(o r h av e) an y cu s t o m er o t h er t h an LTB. In d eed , h e b el i ev edthatLTB was “ t h e o n l y en ti t y th at * * * [h e] h adan o p t i o n t o g o wi t h .” He n ev er p o s s es s edan y o f h i s l en s es an d(as s u m i ng th ey ex is t ed ) h e co u l d
n o ti d en t i fy

th em atthe Del t a s i t e. In s h o rt , M r. Ol sen ’ s co u rs e o f co n du ctwas en t i rel y i nco n s is t en twi t h th at
o f a p ers o n en g ag edi n an equi p m en tren t al b u s in es s . He s h o wedn o reg ul ar o r act i ve i n v o l v em en ti n an y ren t al act i v i t y . He s up p li edn o ev i d en ce t h atPFO So l ar h ad a b an k acco un t , b o o k s an dreco rd s , b u s i n es s p lan s , o r m ark et in g s t rat eg i es . An dh e p res en tedn o ev id en ce--i n th e fo rm o f t i m e l og s , cal en d ars , o r d i ari es --t o- 2 9 -

[* 2 9 ] s h o w th atth e t i m e h e d ev o t edt o h i s s up p o s ed“ b u s in es s ” ex ceed ed t h e few
m i n u t es n eces s ary

t o s ig n o ne p red raft edl eas e co nt ract a y ear. Th i s p l ai n ly d o es
n o tri s e t o th e l ev el o f a “ trad e o r b u s i n es s . ” See J afarp o u r v . Co m m i ss i on er, T.C. M em o. 2 0 1 2 -1 6 5 (d i s al l o wi n g d ep reci at i o n d educt i o n s wh ere t ax p ay ers fai l edt o
s h o w act iv e i n v o l v em en ti n ren t al b u s i n es s ). 6 C. Pro p ert y

Hel d fo r t h e Pro du ct i on o f In co m e In th e cas e o f an i n d i v i dual s ect i o n 2 1 2 al l ows as a d educt i o n o rd i n ary an d
n eces s ary ex p en ses p ai do r i n cu rred“ fo r t h e p ro du ct io n o r co l l ect i o n o f i nco m e”
o r “ fo r t h e m an ag em en t , co n s erv at i o n , o r m ai n t en an ce o f p ro p ert y h el dfo r t h e p ro du ct i o n o f i n co m e.” Sec. 2 1 2 (1 ) an d(2 ). Fo r p u rp o ses o f t h i s i n qui ry , s ect i o n s 1 6 2 an d2 1 2 “ are co n s i d eredi n p ari m at eri a, requ i ri n g * * * [t h e t ax p ay er] t o en g ag e i n th o s e act i v i t i es wi t h a p ro fi t -s eek i n g m o t i v e, i n dep en d en to f t ax s av i n g s .” Co l li n s v . Co m

m is s i o n er, T.C. M em o . 2 0 1 1 -3 7 , 1 0 1 T.C.M . (CCH) 1 1 71 , 1 1 7 2 (ci t i n g Beck v . Co m

m is s i o n er, 8 5 T.C. 5 5 7 , 5 6 9 -5 7 0 (1 9 8 5 )). Dep reci at i o n an d

6 Pet i t i on ers err i n as s ert i n g th at“ t h e i s s u e t o b e ad dres s edb y th i s Co u rti s wh et h er l eas i n g act i vi ti es can ev er b e d eem eda t rad e o r b u s i n es s.” Res po n d en t d o es no tco n t en d (an dco u l d n o tp l au s i b ly co n t en d ) t h atl eas i n g act i v i ti es n ev er co n st i tu t e a trad e o r b u s i n es s . Rat h er, res po n d en tco n t en ds th atM r. Ol s en fai l ed t o p ro v e t h ath e en g ag edi n an y b u s in es s act i vi t y --b e i ts o lar en erg y o r eq u i p m en t l eas i ng --o n a reg ul ar, ex t en s iv e, an dco n t i n u o u s b as i s wi t h th e p ri m ary p u rp o s e o f earn i n g a p ro fi t .- 3 0 -

[* 3 0 ] am o rt i zat i o n are al l owedwi t h res p ectt o p ro p erty h el db y th e t ax p ay er o n l y i f t h e p ro p erty i s “ h el dfo r t h e p ro du ct i o n o f i nco m e.” 7 Sec. 1 6 7 (a)(2 ). Th e Co d e l im i ts d edu ct i o n s b y i nd i v i du al s “ [i ] n t h e cas e o f an act i v i t y n o t
en g ag edi n fo r p ro fi t .” Sec. 1 8 3 (a) an d(b ). In thatev en td edu ct i o ns are al l o wab l e
o n l y t o t h e ex t en t t h at(1 ) t h ey wo u l db e al l owab l e (e.g ., as i t em i zedd edu ct i o n s ) reg ard l es s o f wh et h er t h e act i v i t y was en g ag edi n fo r p ro fi to r (2 ) th e d edu ct i o n s d o n o t ex ceed the t ax p ay er’ s g ro s s i n co m e fro m th e act i v i t y

(l es s an y d edu ct i o n s al l o wed by

s ub s ect i o n (b )(1 )). Sec. 1 8 3 (b ). Pet i t io n er recei v edn o g ro s s i n co m e fro m th e l en s es du ri n g 2 0 1 0-2 0 1 4 , an dh i s cl ai m edd ep reci at i on d edu ct i o n s wo u l d
n o to t h erwi s e b e al l o w ab l e u nd er t h e Co d e. Th u s , h e i s al l o wedn o d edu ct i o n s
u n l es s h o l d i n g th e l en s es was an act i v i t y th ath e “ en gag edi n fo r p ro fi t . ” Sec. 1 8 3 (b )(1 ); s ee Co l l i n s , 1 0 1 T.C.M . (CCH) at 1 1 7 2 (“ T he p ro fi t -o b ject i v e an al y s i s
u n d er s ect i o n 1 8 3 g o v ern s p art i cu l ar [t ax ] s h el t er i n v es t m en t s.”). In d et erm in i n g wh et h er a t ax pay er h ada p ro fi tm ot i v e, we co n s id er (am o n g
o t h er t hi n g s ) t h e t i m e an deffo rth e d ev o t es t o t h e act i v i t y ; th e m an n er i n wh i ch h e

7 W e as s um e wi th ou td eci d i n g t h atp et i ti o n er “ h el d p ro p ert y ” wi t h i n th e m ean i n g o f s ecs . 1 6 7 an d 2 1 2 . Pet i t i o n er n ev er p o s s es s edth e l en s es ; th e l en s es h e p u rch as edco u ldn o t b e i d en t ifi ed ; an d h e co u l dn o tes t ab l is h th atth o s e l en s es actu al l y ex i s t ed atth e Del t a s i t e. Un d er t h es e ci rcu m s t an ces i t co u l d b e arg u ed t h atth e en ti re t ran s act i o n was a s h am , i .e., th atp et i ti o n er n ev er p u rch as edo r h el d p ro p erty b u t s im p ly p ai dcas h i n ex ch an g e fo r t ax b en efi t s . Gi v en o u r d i s po s i t io n , we n eedn o td eci d e t h at qu es t i o n .- 3 1 -

[* 3 1 ] carri es i t o n ; th e ex p ert i s e o f t h e t ax p ay er an d h is ad v i s o rs ; the t ax p ay er’ s h i s t o ry o f i n co m e an dl o s s es fro m th e act i v i ty ; an y

ex p ect at i o n th atp ro pert y u s ed i n the act i v i t y

wi l l ap p reci at e i n v al u e; an dth e fi n an ci al s t atus o f t h e t ax p ay er. See s ec. 1 .1 8 3 -2 (b ), In co m e Tax Reg s . Th e t ax p ay er’ s p ro fi tm o t i v e m u s t b e actu al an dh o n es t ; i n d i s cern i n g th atm o t i v e we g i v e m ore wei g h tt o o b ject i v e fact s t h an t o s el f-s erv in g s t at em en t s . See Drei cer v . Co m m i s s io n er, 7 8 T.C. 6 4 2, 6 4 5 (1 9 8 2), aff’ dwi t h o utp ub li s h edo p i n i o n , 7 0 2 F.2 d1 20 5 (D.C. Ci r. 1 9 8 3 ). Wh et h er a t ax p ay er h as a g en u i n e p ro fi tm o t i v e i s a qu es t i o n o f factt o b e d et erm i n edfro m al l th e rel ev an tev i d en ce. See i b i d
. M r. Ol s enp ro v i dedn o ev i den ce, o t h er t h anh i s s el f-s erv i n g t es t i m o n y , th at h e h el dth e l en s es “ fo r t h e p ro du ct i o n o f i n co m e” o r th ath e p u rch as edth em wi t h

“ ‘ t h e p red o m i n an t, p ri m ary o r p ri n ci p al o b

ject i ve’ o f real i zi n g an eco n o m i c p ro fi t i n d ep en den to f t ax s av i n g s . ” See Gi l es v . Co m m i s s io n er, T.C. M em o . 2 0 0 6 -1 5 , 9 1 T.C.M . (CCH) 6 8 4 , 6 8 8 & n .1 0 (qu o t i n g W o l f v . Co m m i s s io n er, 4 F.3 d 7 09 , 7 1 3 (9 t h Ci r. 1 9 9 3 ), aff’ g T.C. M em o . 1 9 9 1 -2 1 2 ). Th e l en s es g en erat edn o i n co m e du ri n g 2 0 0 9 -2 01 4 . Th e o n ly fu tu re i n co m e M r. Ol s enco u l dex p ectt o recei v e
u n d er t h e l eas e ag reem en twas an n u al ren to f $ 1 5 0 p er l en s , b u tn o ren two u l dev er b e p ai du n les s th e p ro

jectactu al l y

p ro du cedel ect ri ci t y . Gi v en th e l acko f an y p ro g res s t o wardco m

pl et i o n o f t h e p ro

ject an d h i s o wno b s erv at i o n t h atth e- 3 2 -

[* 3 2 ] equi p m en t “ l o o k s a l it t l e l i k e ju n k ,” we d o n o tb el iev e t hatM r. Ol sen g en ui n el y ex pect edt o recei v e an y

fu ture ren t al i n co m e. An dev eni f h e d i d , h e
m ad e n o effo rtt o s h o w th atth e p res en t d i sco u n t edv al u e o f fu tu re ren tp aym en t s
wo u l dco m e cl o s e t o $ 2 42 ,0 0 0 , th e n o m i n al p u rch as e p ri ce o f th e l en s es h e acq u ired
. 8 M r. Ol s enh adn o ex p ert i s e i n s o lar en erg y o r eq u ip m en tl eas i n g , an dh i s
o n l y “ ad v i so rs ” were p ro m o t ers o f the t ax s h el t er. Hi s fu l l -t i m e jo b as an at t o rn ey l i m i ted h is ab i l i t y t o p art i ci p at e m ean in g fu l l y i n ei t h er act i v it y , an d h e i n factd ev o t edv i rtu al l y

n o t i m e t o ei t h er. Ap artfro m cu t t i n g ch eck s an dv i s i t i n g t h e Del t a
s i te o n ce o r twi ce, h e co n ced edth ath i s act i v i t i es were l im i t edt o “ ren ewi n g th e LLC each y ear,” “ m ai nt ai n i n g PDF co p i es o f t h e d o cu m en t s ,” an d “ ju s t t ry i n g t o d et erm i n e h o wm an y

l en s es t o p u rch as e.” He h adn o ex pect at i o n t h atth e l en s es
wo u l dap p reci at e i n v al u e. To t h e co n t rary , u n l es s t h e p ro jectactual l y

p ro du ced el ect ri ci ty ata co m m erci al rat e--an ev en tv ery u n l i k el y t o o ccu r--t h e l en ses were
es s en t i al l y wo rt h l es s .

8 In 2 0 1 1 , fo r ex am

p l e, p et i t i o n er p u rch as ed1 4 l en ses fo r $ 4 9 ,0 0 0 . Th e l eas e ag reem en t cal l edfo r an n ual ren tp aym en t s o f $ 1 5 0 p er l en s (o r $ 2,1 0 0 ), an d t h es e p aym en t s wo u l dn o tb eg i n fo r m an y y ears (i f ev er). Ig n ori n g t h e t im e v al u e o f m on ey an dth e ri s kth atth e p ro

jectwo u l d n ev er p ro duce el ect ri ci t y , i two u l d t ak e 2 4 y ears o f ren t p aym en t s fo r p et i ti o n er t o reco up h i s i n ves t m en t .- 3 3 -

[* 3 3 ] M r. Ol s en ’ s fi rs tp u rch as e ag reem en t , s i g n edi n 2 0 0 9 , p ro v id edth atth e $ 1 8 ,0 0 0 d o wnp aym en two u l db e refu n d edi f IAS fai l edt o “ i n s t al l an ds t artup ” t h e l en s es b y Decem b er 3 1 , 2 0 09 . M r. Ol s en kn ew t hatIAS h adfai ledt o m eetth i s d ead li n e fo r 2 0 0 9 (an dev ery s ub s equ en ty ear). Bu th e d i dn otd em an da refu n do r
o t h erwi s e at tem

p tt o cu th i s l o ss es as a p ro fi t -s eek i n g i n v es t or wo u l d d o . See s ec. 1 .1 83 -2 (b )(1 ), In co m e Tax Reg s . (“ [A] b an d o nm en to f u np ro fi t ab l e m et ho d s * * *
m ay al s o i n d i cat e a p ro fi tm o t i v e.”); s ee al s o Ho ffm an n v . Co m m i s s i o n er, T.C. M em o. 2 0 1 6 -6 9 , 1 1 1 T.C.M . (CCH) 1 3 14 , 1 32 0 (“ J us tas ab an d o ni ng u np ro fi t ab l e
m et h o ds can i n d i cat e a p ro fi tm o t i ve, * * * a co n t i n u i n g an du n ex p l ai n edfai l u re t o ab an do n an u np ro fi tab l e act i v it y ev i d en ces m o t iv es o t h er t h an p u rs u i t o f p ro fi t[.] ”). In as s es si n g t h e “ fi n an ci al s t atu s o f t he t ax p ay er,” we co n si d er wh et h er M r. Ol s en h ad“ [s ] ubs t an ti al i nco m e fro m s o u rces o t h er t han th e act i v i t y (p art icu l arl y i f t h e l o ss es fro m

th e act i v i t y g en erat e s ub s tan t i al t ax b en efi t s).” Sec. 1 .1 8 3
- 2 (b )(8 ), In co m e Tax Reg s . M r. Ol s enh ads ub s t an t i al wag e i n co m e du ri n g 2 0 1 0
- 2 0 1 4 , ran g in g fro m

$ 1 4 5 ,5 1 8 t o $ 1 8 3 ,3 4 4 . An dth e t ax b en efi ts h e d eri v edfro m b u y i n g l en s es en ab ledh im t o redu ce p et i t i o n ers ’ t ax ab l e i n co m e es s en ti al l y t o
zero . Th e t ax b en efi t s were t h u s “ s ub s t an t i al .”- 3 4 -

[* 3 4 ] W e fi n dth atM r. Ol s en pu rch as edth e l en ses p ri m ari l y t o s ecu re t ax b en efi ts , n o tt o earn a p ro fi t. Th e p ro m o t ers i n du cedh i m t o p urch as e l en s es b y

t o u t i n g t h ei r ab i l i t y

t o g en erat e t ax s av i n g s . Th ey u rg edh i m

t o “ [b ] uy o u r s o lar u ni t s wi t h y o u r t ax m o n ey i n s t eado f g i v in g i taway t o the IRS.” Bu y i n g l en s es , th ey s ai d , wo u l den ab l e h i m t o “ d o ub le * * * [h i s ] i n v es t m en tfro m t he IRS i n t ax b en efi t s .” Th ey ex pl ai n edth at“ [y ] o u r o bject iv e i n p u rch as i n g y o u r s y st em s i s t o zero o u t y o u r t ax es .” An d i n d eed , d es p i t e a s l i g h tm i s cal cu l at i o n i n 2 0 1 4 , wh i ch p ro du ced a t ax l i ab i l i t y

o f $ 1 , 5 3 8 , M r. Ol s en p u rch as ed ju s ten o u g h l en s es t o “ zero o u t ” h i s t ax l i ab i l i t y

fo r ev ery y ear at i s s u e. Th i s i s s t ro n g ev i d en ce t hath e was s eek i n g t o
m ax i m i ze t ax s av i n g s, n o tt o g en erat e eco n o m i c p ro fi t. Ev al u at in g t h e fact s o v eral l , we co n cl ud e t h atM r. Ol sen p u rch as edth e l en s es , n o twi t h an “ actu al an dh o n es to b j ect i v e o f m ak i n g a p ro fi t,” Drei cer, 7 8 T.C. at6 4 5 , b u trat her t o s h el t er h i s t ax ab l e wag e i n co m e b y cl ai m i n g art i fi ci al l o s s es . Pet i t i o n ers th erefo re h av e n o al l o wab l e d edu ct i o n s fo r d ep reci at i o n du ri n g 2 0 1 0 -2 0 1 4 . See s ec. 1 8 3 (a) an d(b )(1 ). An d b ecau se p et i t i o n ers h av e n o al l o wab l e d educt i o n s fo r d ep reci at i o n o n th e l en s es , th e l en s es were n o t “ en erg y p ro p ert y ” up o n wh i ch en erg y

t ax cred i t s co u l db e cl ai m ed . See s ec. 4 8 (a)(3 )(C); s ec. 1 .4 8-9 (a)(2 ), In co m e Tax Reg s . (“ Pro p ert y i s n o ten erg y

p ro p ert y u n l es s d ep reci at io n * * * i s al lo wab l e[.] ”).- 3 5 -

[* 3 5 ] D. Pl aced i n Serv ice Ev en i f M r. Ol s en co u l ds h o w th ath e u s edth e l en s es i n a t rad e o r b u s i n es s
o r h el dth em

fo r p ro du ct i o n o f i n co m e, p et i t i o n ers face an o th er p ro b l em . To cl ai m d ep reci at i o n d edu ct i o n s an den erg y cred i t s , a t ax p ay er m

u sts h o wth at t h e p ro p ert y
was “ p laced i n s erv i ce” d u ri n g t h e y ear fo r wh ich th e am o u n t s are cl ai m ed . See
s ec. 4 8 (a)(1 ); s ec. 1 .1 6 7 (a)-1 0 (b ), In co m e Tax Reg s . Anas s eti s “p l aced i n s erv i ce” wh en“p laced i n a co nd i t i o n o r s t at e o f read i n es s an dav ai l ab il i ty fo r a s p eci fi cal l y as s i g n ed fu n ct io n.” Sec 1 .1 6 7 (a)-1 1 (e)(1 )(i ), In co m e Tax Reg s . ; s ee s ec. 1 .4 6-3 (d )(1 )(i i ), In co m e Tax Reg s . (u s i n g th e s am e d efi n i t i o n o f “ p laced i n s erv i ce” fo r en erg y

cred i t p u rp o s es ). If t h e as set i s “ an i n d i v i du al co m p o n en tth ati s d es i g n ed t o o p erat e as a p art
o f a l arg er s y s t em

[b u t ] i s i n cap ab l e o f co n t ri b u ti n g t o th e s y st em i n i so l at i o n ,” t h e
as s et “ i s n o treg ard edas p l aced i n s erv ice u nt i l th e en t i re s y s t em reach es a co n d i
t i on o f read i n es s an dav ai l ab il i t y fo r i t s s p eci fi cal l y

as s i g n edfu n ct io n .” Green Gas Del . St atu t o ry

Tr. v . Co m

m i s s i on er, 1 4 7 T.C. 1 , 5 2 (2 0 1 6 ), aff’ d , 9 0 3 F.3 d 1 3 8 (D.C. Ci r. 2 0 1 8 ). In d i v i du al co m p o n en t s , th erefo re, “ are n o tt o b e co n s i d ered p l aced i n s erv i ce s ep arat el y fro m th e s y s t em

o f wh i ch they

are an es s en ti al p art .” Seal y Po wer, Lt d . v . Co m

m i s s i o n er, 4 6 F.3 d3 8 2 , 3 90 (5 t h Ci r. 1 9 9 5), aff’ g i n p art , rev ’ g i n p art o n o t h er g ro u n ds T.C. M em o . 1 9 9 2 -1 6 8; s ee Pu b . Serv . Co . v .- 3 6 -

[* 3 6 ] Un i t edSt at es , 4 3 1 F.2 d 98 0 , 9 8 4 (1 0 th Ci r. 1 97 0 ) (h o l d i n g th ati n di v i du al
co m p o n en t s o f a p o wer p l an tco u l dn o tb e co n s id ereds ep arat el y b ecau s e n o
co m p o n en t“ wo u ld s erv e an y u s efu l p u rp o se” o n i t s o wn ). Th e l en s es p et i t i o n ers p urch as edwere i n t en d edt o o p erat e as p arto f a co m p l i cat ed s o l ar en erg y s y s t em an dwere i n cap ab le o f p erfo rm i n g an y u s efu l fu n ct io n i n i so l at i o n . Th ere i s n o ev id en ce t h atp et i t i on ers ’ l en s es h adb een i n s t al l edo n a t o wer, m uch l es s t h atthey

co n t ri b u t edt o a s y s t em

th at h adreach edan o v eral l s t at e
o f read i n es s . Pet it i on ers ’ o wnex p ertco n ced edth at , as o f 2 0 1 5 , IAS h adequ i p p ed ju s t o n e t o w er wi t h a fu l l arrayo f l en s es , m ean i n g th at “ t ho u s an ds o f l en s es h ad
n o tb een i n s t al l ed .” Bo th ex pert s o b s erv edu n i n s t al l edl en s es b ro k en an ds cat t ered
acro s s th e Del t a s i t e, wi t h th e b al an ce rem ai n i n g o n p al l et s , s t i l l u n wrap p ed , u n cu t , an d u n fram ed . Pet it i on ers d o n o tco n t en d(an d co u l dn o tp l au s ib l y co n t en d) t h at t h ei r l en s es were cap ab l e o f p ro du ci ng el ect ri ci t y o n thei r o wn . Th e l en s es acco rd
i n g l y were n o t“p l aced i n s erv ice” b ecau s e t h e s o l ar en erg y s y s tem as a wh o l e was
n o t“ i n a co n d i t io n o r s t at e o f read i n es s an dav ai l ab i l i t y fo r a s p eci fi cal l y as s i g n ed fu n ct i o n .” Sec. 1 .4 6 -3 (d )(1 )(i i), In co m e Tax Reg s . Th e s am e co n cl us i o n fo l l o ws u n d er t he an al y s i s we h av e em p l oy edt o d et erm i n e wh et her an el ect ri ci t y -g en erat i n g faci l i t y , i n p art i cu l ar, h as b een “p l acedi n- 3 7 -

[* 3 7 ] s erv i ce.” See Green G as Del . St atu t o ry Tr., 1 4 7 T.C. at5 1. W e t h ere
co n si d eredfi v e fact o rs : 1 ) wh et h er t h e n eces s ary

p erm it s an d l i cen s es fo r o p erat i o n h av e b een o b t ai n ed ; 2 ) wh et h er cri ti cal p reo perat io n al t es t i n g h as b een co m p let ed ; 3 ) wh et h er th e t ax p ay er h as co n t ro l o f t h e faci l i ty ; 4 ) wh et h er t h e u n i th as b een s yn ch ro n i zedwi th th e t ran s m i s s io n g ri d ; an d5 ) wh et h er d ai ly

o r reg u l ar o p erat i o n h as b eg u n . * * * [Ib i d
. (qu o t i n g Seal y

Po wer, Lt d ., 4 6 F.3 dat3 9 5 ).] Each o f t h es e fact o rs wei g h s ag ai n s tp et i t i o n ers . IAS an dRaPo wer h ado b
t ai n edn o p erm i t s fo r o p erat i o n o f a s o l ar en erg y p l an t . Th ere i s n o ev id en ce t h at t h ey h adco m p l et ed“ cri t i cal p reo p erat i on al t es t i n g.” Qu i t e t he co n t rary : Dr. M an ci n i i n rev i ewi n g M r. J o h n s o n ’ s m at eri al d i sco v ered“ no t es t s , n o t es t rep o rt s , [an d ] n o d o cu m en t at i o n o f an y ty p e” an d fo u n dn o ev i d en ce t h at t h e Del t a s i t e h ad

“ b een recen t l y u s edfo r an y t es tact i v i t y .” Th e s ol ar p l an th ad n o t“ b een s yn ch ro n i zedwi th th e t ran s m i ss i o n g ri d ”; “ d ai ly o r reg u l ar o p erat i o n ” o f t h e faci l i t y o b
v i o u s l y h adn o tb eg u n; an d n o o n e h adas s u m ed“ co n t ro l” o f a fu n ct i o n al p o wer p l an t . In d eed , Dr. M an ci ni cred i b l y t es t ifi edth atthe p ro

ject , ev en i f co m

p l et ed , wo u l dn ev er b e cap ab le o f g en erat i n g el ect ri ci t y o n a co m m erci al s cal e. Pet i t i o ners ap p ear t o co nced e t h atth ei r l en s es were n o t “pl aced i n s erv i ce” i n an o perat i o n al s o l ar en erg y s y s t em . In s teadth ey co n t en dth atth e l en s es “ were p l aced i n s erv i ce up o n th e d at e o f acq u i s i t i o n,” b ecau s e t h atwas th e d at e o n wh i ch- 3 8 -

[* 3 8 ] th ey

“p u t [th e l en s es ] i nt o u s e i n * * * [t hei r] l eas i n g t rad e o r b us i n es s .” Pet i t io n ers as s ertth atth ei r l en s es were p l aced i n s erv i ce wh en i n i ti al l y “ h el do u t fo r l eas e.” W e are n o tp ers u ad ed . To b eg i n wi t h , M r. Ol s en was n o ten g ag edi n a

“ l eas i n g trad e o r b u s i n es s .” See s up ra p p . 2 7 -2 8 . No r were t h e l en s es ev er “ h el d
o u tfo r l eas e.” M r. Ol s en d idn o m ark et i n g an ds o u g htn o cu st o m ers fo r h i s l en s es ; rat h er, h e l eas edth em b ackt o M r. J o h n so n ’ s affi li at es t h e m o m en taft er h e p u rch as ed t h em . Pet i t i o ners err i n rel y i ng o n Co o p er v . Co m m i s s i o n er, 8 8 T.C. 8 4 , 1 1 3 -1 1 4 (1 9 8 7). Th e t ax p ay ers th ere h adp u rch as ed s ol ar wat er-h eat i n g s y s t em s th atwere read y fo r i n s t al l at io n b y

h o m eo wn ers . Id . at8 5-8 8 . Th e t ax p ay ers i m m ed i at el y l eas edth e s y s t em s t o a t h i rdp arty , wh o l at er s ub leas edth em t o h o m eo wn ers . Ib i d
. Th e t ax p ay ers cl ai m edi nv es t m en tcred i ts i n the y ear t h e s y s t em s were p u rch as ed
an d l eas ed ; th e IRS d i s al l o wedth e cred it s , co n t en d i ng th at t h e s y s tem s were n o t

“ p l acedi n s erv i ce” u n ti l th ey were i n s t al l edi n i n d iv i dual h o m es . Id . at1 1 3
. W e s i d ed wi t h the t ax p ay ers . Atth e o u t s etwe fo u n dth atthe t ran s act i o n s
am on g th e s el l er o f t he wat er-h eat i n g s y s tem s, th e p u rch as ers , an dth e l es s ee were

“ g en u i n e m

u l t i p le p art y

tran s act i o n s .” Id . at1 0 4 . Th e IRS co n t en d edth at t h e t ran s act io n s “ were a s eri es o f s h am s ,” u rg i n g t h atth e p art i es i n real i t y h ad“ en -- 3 9 -

[* 3 9 ] t eredi n to a s al e-l eas eb acktran s act i o n * * * (i .e., a two -p arty tran s act i o n ).” Id . at1 0 3 . W e reject edth atch aract eri zat i o n b ecau s e i ti g n o redth e s ep arat e
co rp o rat e ex is t en ce o f t h e l es s ee. Ib i d
. Onth e m eri t s we ag reedwi t h th e t ax p ay ers th atth e wat er-h eat i n g s y s t em s were “ p l aced i n s erv ice” wh en p u rch as edan dl eas edb ecau s e t h ey h adb een

“ p l acedi n a co n di t i o n o r s t at e o f read i n es s an dav ai l ab i l i t y fo r a s p eci fi cal l y
as s i g n edfu n ct i o n . ” Id
. at 1 1 3 (qu o t i n g s ect io n s 1 .4 6 -3 (d )(1 )(i i) an d1 .1 6 7 (a)- 1 1 (e)(1 )(i ), In co m e Tax Reg s .). Al t h o ug h t he s y s tem s were “ n o ti n actu al u s e du ri n g th e y ear i n i s s u e,” th ey were “ nev ert h el es s d ev o t edt o th e b u s in es s o f t h e t ax p ay er an dread y

fo r u s e.” Ib i d . (qu o t i n g Cl em en t e, In c. v . Co m m i s s io n er, T.C. M em o. 1 9 8 5 -3 6 7 , 5 0 T.C.M . (CCH) 4 9 7, 5 0 4). W e h adp rev i o u s l y h el d , i n a cas e i n v o l v i n g l eas edm ed i cal equi pm en t , th at“pro p ert y wh i ch i s h el dfo r l eas i n g t o
o t h ers i n a p ro fi t -m o t i vat edl eas i n g v en tu re i s p l aced i n s erv i ce wh en i t i s fi rs th el d
o u tfo r l eas e.” Id . at1 1 4 (ci t in g W ad d el l v . Co m m i s s i o n er, 8 6 T.C. 8 4 8 (1 9 8 6 ), aff’ d , 8 4 1 F.2 d2 6 4 (9 t h Ci r. 1 9 8 8 )). Fo l l owi n g t h es e p reced en t s , we h el d i n Co o p er t h atth e wat er-h eat i n g s y s t em s “ w ere p l aced i n s erv i ce as o f th e d at e o f p u rch as e” b ecau s e “ t he s y s t em s were av ai l ab l e fo r u s e i n * * * [t h e t ax p ay ers ’ ] p ro fi t-m o t i v at edl eas i ng v en tu re.” Ib i d
.- 4 0 -

[* 4 0 ] Pet i t i o ners ’ rel i an ce o n Co o p er i s m i s p laced fo r atl eas tthree reas o n s . Fi rs t , Co o p er i n v o l v ed“ g en u i n e m ul t i p l e p art y

tran s act i o ns ,” wh ereas thes e cas es i n v o l v e a s al e-an d -l eas eb acktran s act io n b et w een a t ax s hel t er i n v es t o r an dthe t ax
s h el t er p ro m o t er. Seco n d , th e p ro p ert y i n Co o p er co n si s t edo f i n t eg rat edwat erh eat i ng s y s t em s thatwere read y fo r i n s t al l at io n t o d i s ch arg e t h ei r d es i g nat ed fu n ct i o n . Pet i t i o n ers ’ l en s es were m ere co m p o n en t s o f a s y s tem , an d(as far as th e
ev i d en ce s h o ws ) t h ey

rem ai n edu n wrap p edo n p al l et s atth e Del t a s i t e. 9 Th i rd , th e equ ip m en ti n Co o p er was “ av ai l ab l e fo r u s e i n * * * [t h e t ax pay ers ’ ] p ro fi t m o ti v at edl eas i n g v en tu re.” 8 8 T.C. at1 1 4
. M r. Ol s en was n o ten g ag edi n a l eas i ng b u s i n es s an d h i s v en tu re was cert ai n l y n o t “ p ro fi t -m o t i v at ed .” See s up ra p p . 2 7 -3 4
. E. Pas s iv e Act i vi ty

Lo s s es Fi n al l y , ev en i f p et i t io ners h adm et al l o f th e fo reg o i n g req u irem en ts an d h ad p l acedth e l en s es i n s erv i ce du ri n g 2 01 0 -2 0 14 , th e Co d e d i s al l o w s l o s s es an d cred i t s co n n ect edt o a “ p as s i v e act i v i t y . ” Sec. 4 6 9. Co n gres s en act eds ect i o n 4 69

9 See, e.g ., Hu d s o n v . Co m m i s s i o n er, 1 0 3 T.C. 9 0, 1 0 6 (1 9 9 4) (h ol d i n g th at an au di o b o o k“ m

u stb e co m

p l et edan db e av ai l ab l e fo r u s e b efo re i tcan b e p l aced i n s erv i ce”), aff’ d , 7 1 F.3 d8 7 7 (5 th Ci r. 1 9 95 ); Co i t v . Co m m i s s i o n er, T.C. M em o. 1 9 8 7 -5 0 9 , 5 4 T.C.M . (CCH) 8 1 6, 8 2 4 (h o l d i n g th atren t al p ro p ert y m u s t b e co ns t ru ct ed an d b e “ av ai l ab l e fo r o ccup an cy ” b efo re i tcan b e d eem edp l aced i n s erv i ce).- 4 1 -

[* 4 1 ] t o p rev en t t ax p ay ers fro m redu ci n g reg u l ar i n co m e (s uch as wag es ) b y l o s s es at t ri b u t ab l e t o p urel y

p as s i v e act i v i t i es . See Hi l lm an v . Co m m i s s i on er, 1 1 8 T.C. 3 2 3 , 3 2 9 (2 0 0 2). Gen eral l y s p eak i n g , a t ax p ay er m ay d edu cta p as s i v e act i v i t y l o s s , o r cl ai m

a p as s i v e act i v i t y

cred i t, o nl y

t o th e ex ten tthath e h as p as s iv e act i vi t y i n co m e fo r t h e y ear i n qu es t i o n . Sect i o n 4 6 9 p ro v id es , i n t h e cas e o f an i n d i v idu al , thatn ei t h er “ t h e p as s i v e act i vi t y l os s ” n o r “ th e p as s i v e act iv i ty cred i t ” s h al l b e al l o w edfo r t h e t ax ab l e y ear. Sec. 4 6 9(a)(1 ). A “p as s i v e act i v i t y ” i n cl u des an y act i v i t y “ in wh i ch th e t ax p ay er d o es no tm at eri al l y

p art i ci p at e” an dg en eral l y i n cl u des “ an y

ren tal act i vi t y .” Sec. 4 6 9 (c)(1 ) an d (2 ). A t ax p ay er i s treat edas “ m at eri al l y p art i ci p at i n g” i n an act i vi t y
o n l y i f h e i s i n vo l v edi n i ts o p erat i o n s o n a b as i s t h at i s “ reg u l ar,” “ co n ti n uo u s ,”
an d “ s ub st an ti al .” Sec. 4 6 9 (h )(1 ). Th e t erm “p as s i ve act i v i t y

l o s s ” m ean s th e am o u n t(i f an y ) b y wh i ch th e t ax p ay er’ s ag g reg at e l o s s es fro m p as s i v e act i v i t i es fo r t h e t ax ab l e y ear ex ceed h i s ag g reg at e i n co m e fro m

p as si v e act i v i t i es fo r t h aty ear. Sec. 4 6 9 (d )(1 ). As rel ev an t h ere, t h e t erm

“pas si v e act i v i t y

cred i t ” m ean s th e am o un t(i f an y ) b y wh i ch al l g en eral b u s i n es s cred i ts (i n cl u d i n g en erg y cred i t s ) fro m p as s i v e act i v i t ies ex ceed t h e t ax p ay er’ s “ reg ul ar t ax l i ab i l i t y * * * fo r th e t ax ab l e y ear al lo cab l e t o al l p as s i ve act i v i t i es .” Sec. 4 6 9 (d )(2 )(A)(i ), (B); s ee s ecs . 3 8 (b )(1 ), 4 6 (2 ).- 4 2 -

[* 4 2 ] M r. Ol s en ’ s p u rp o rt ed l en s -l eas i n g act i v i t y was a p as s i v e act i v i ty

b ecau s e i t
co n si s t edo f “ ren t al act i v i t y ” t h atd i dn o ti n v ol v e a “ real p ro p ert y b u s i n es s .” Sec. 4 6 9 (c)(2 ), (7 ). In an y

ev en th i s l en s -rel at edact i v i ty was p as si v e b ecau s e h e d i d
n o t“ m at eri al l y

p art ici p at e” i n i tb y

d ev o t i ng effo rtth at was “ reg u l ar,” “ co n t i n u o u s ,” an d“ s ub s t an ti al .” Sec. 4 6 9 (h )(1 ); s ee s upra p p. 2 4 -2 8
. Pet i t i o ners h adn o “p as s i v e i n co m e” du ri n g 2 0 1 0 -2 0 1 4 , ei t h er fro m l en s rel at ed act i v it y

o r an y o t h er en d eav o r. If t h e d ep reci at i o n d edu ct i on s cl ai m edo n t h ei r Sch edu l es C h adb een al l owab l e, t h e l o ss es g en erat edb y th os e d edu ct i o n s
wo u l db e n o n dedu ct i b le p as s i v e l o s s es . An db ecau s e p et i t i on ers h adn o reg u l ar t ax l i ab i l i t y

al l o cab le t o p as s iv e act i v i t i es fo r 2 0 1 0-2 0 1 4 , s ee s ec. 4 69 (d )(2 ), an y
en erg y cred i t s t h ey

m i g h tp ro p erl y

h av e cl ai m edwo u l db e “ p as si v e act i v i t y cred
i t s” t h atwo u ldn o t h av e b een cu rren t l y al l o wab le. To refl ectthe fo reg o i n g , Deci s i o n s wi l l b e en t eredu n der Ru l e 1 5 5
.