                         T.C. Memo. 2003-151



                       UNITED STATES TAX COURT



BERNARD WILLIAM HVIDDING AND FALEASIU E. HVIDDING, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6934-00.              Filed May 23, 2003.



     Paul J. Sulla, Jr., for petitioners.

     Jonathan J. Ono, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:    Respondent determined a deficiency in

petitioners’ Federal income tax of $536 for 1996.   The sole issue

for decision is whether petitioners are entitled to a $536 energy

tax credit for 1996.   We hold that they are not.
                                - 2 -

     Unless otherwise provided, section references are to the

Internal Revenue Code in effect for 1996.    References to

petitioner are to Bernard William Hvidding.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

A.   Petitioners

     Petitioners resided in Kapolei, Hawaii, when they filed

their petition.    In 1996, petitioner was a social worker with the

Department of Human Services of the State of Hawaii.

B.   Hawaii Environmental Holdings

     Hawaiian Environmental Holdings (HEH) is a business trust.

HEH’s minutes provide that the trustees have complete discretion

to distribute tax credits and depreciation to its beneficiaries.

C.   The Solar Hot Water System

     Petitioners purchased their home in Kapolei in 1995.    In

1996, Jeff Davis (Davis), a salesman for Mercury Solar, an

organization engaged in the sale of solar energy heating systems,

asked petitioner if he wanted to have a solar water heating

system installed in his home.   Davis said that petitioner could

either:   (a) Buy a solar water heating system to be installed in

his home by Mercury Solar, or (b) buy only the energy produced by

a solar water heating system owned by HEH and installed in his

home.   Petitioner chose to buy only the energy.
                               - 3 -

D.   Petitioner’s Agreement With HEH

     Petitioner entered into a Solar Energy Purchase Agreement

(SEP) with HEH on December 8, 1996.    Under the SEP, HEH agreed to

sell, and petitioner agreed to buy, the energy produced from the

solar water heating system components owned by HEH and installed

in petitioners’ home.   The SEP agreement had a term of 61 months

from the date the system became operational.   Petitioner agreed

to make monthly payments of $50 for a 61-month period, except

that the payments were $800 in month 1, $2,325 in month 7, $1,500

in month 9, and $300 in month 60.   HEH agreed that, during the

term of the agreement, the solar water heating system and its

installation would be free of defects and that HEH would provide,

without charge to petitioner, all necessary maintenance required

for a solar water heating system under normal use.   During the

term of the agreement, petitioner asked HEH to repair and upgrade

the solar water heating system, and HEH did so.

     Petitioner signed a Beneficiary Enrollment agreement on

December 8, 1996, which provided that petitioner would become a

beneficiary of HEH.   Also on that day, petitioner signed a

document entitled “What Did We Just Do?”, which stated, inter

alia, that:   (1) Petitioner was a beneficiary of HEH; (2)

petitioner was buying only energy from HEH; (3) the trustees of

HEH had discretion to pass solar energy tax credits and

deductions through to petitioner; (4) any credits and deductions
                               - 4 -

passed through to petitioner would be reported on a schedule K-1;

(5) the HEH trustees would pass through to petitioner State tax

credits of $1,750 and Federal tax credits of $575; and (6)

petitioner is liable for all energy payments regardless of

whether any tax credits are passed through to him.     Petitioner

received a beneficiary certificate dated December 31, 1996, which

stated that Federal energy tax credits could be allocated to him

at the discretion of the trustees of HEH.

     On the day petitioner entered into the SEP agreement,

petitioner and HEH jointly applied for a copayment from Hawaiian

Electric Company, Inc. (HELCO), the local public electric

provider.   HELCO offered the $800 rebate under a program intended

to promote the use of solar energy for heating water.     HELCO paid

HEH $800 after April 4, 1997, when a Mercury Solar representative

certified that Mercury Solar had installed the solar heating

system in petitioners’ home in accordance with the HELCO rebate

program specifications.

     Around the time petitioner and HEH entered into the SEP

agreement, HEH agreed to pay Mercury Solar $6,125 to install the

solar system on petitioners’ roof.     HEH agreed to pay a $4,625

downpayment less an $800 electric rebate when work was started,

and $1,500 when work was finished.

     Shortly after petitioner and HEH entered into the SEP

agreement, petitioner signed an Option to Extend Term/Option to
                                - 5 -

Purchase Components which gave petitioner the following three

options at the end of the initial term of the SEP:     (1) Extend

the term for an additional 61 months at a cost of $1 per month;

(2) purchase the solar water heating system at its current price;

or (3) have HEH remove the system.      On a date not stated in the

record, petitioner extended the term for 61 months.

E.   Petitioners’ 1996 Return

     Petitioners claimed an energy credit of $536 (10 percent of

$5,355)1 on Form 3468, Investment Credit, attached to their 1996

Federal income tax return.   Petitioners attached to their return

a Schedule K-1, Beneficiary’s Share of Income, Deductions,

Credits, etc., issued to petitioner by HEH.     The Schedule K-1

indicates that HEH allocated $535 to petitioner as an energy

credit, but it does not indicate that HEH allocated any income to

petitioner for 1996.

F.   The Notice of Deficiency

     On March 21, 2000, respondent issued a notice of deficiency

to petitioners in which respondent determined that petitioners

were not entitled to an energy tax credit because:     (a) The

energy leasing contract was in substance the purchase by

petitioner of solar equipment, and (b) petitioner received no

income as a beneficiary of the HEH trust in 1996 and thus was not


     1
        The exhibits show that HEH agreed to pay Mercury Solar
$5,325. The $30 difference between $5,355 and $5,325 is not
explained in the record.
                                 - 6 -

entitled to the pass through of any energy credit from HEH in

1996.     Petitioners filed a petition in this Court on June 21,

2000.

G.   HEH’s 1996 Income Tax Return

     HEH filed its 1996 Federal income tax return (Form 1041,

U.S. Income Tax Return for Estates and Trusts) on March 30, 2001.

HEH reported that it had attached 130 Schedules K-1 to its

return.     HEH attached to its return an amended Schedule K-1 which

shows the following allocations for petitioner:     (a) Annuities,

royalties, and other nonpassive income before directly

apportioned deductions $100; (b) depreciation $120; and (c)

energy credit Form 3468 $535.     HEH did not send the amended

Schedule K-1 to petitioner.

                                OPINION

A.   Background and Contentions of the Parties

     The parties dispute whether petitioners are entitled to

claim an energy tax credit passed through from HEH for 1996.

     1.      The Energy Tax Credit

     Section 38(a)(2) and (b)(1), in conjunction with section

48(a)(1) and (a)(2)(A), provides an energy tax credit equal to 10

percent of the basis of energy property placed in service during

the taxable year.     Individuals are not entitled to a residential

energy credit after November 4, 1990.     Omnibus Budget
                                    - 7 -

Reconciliation Act of 1990 (OBRA), Pub. L. 101-508, sec.

11801(a)(1), 104 Stat. 1388-520.

     Trusts are eligible for the energy tax credit after November

4, 1990, if they place qualifying energy property in service

during the tax year.     Sec. 38.    Before enactment of OBRA, section

48(f) required trusts to apportion a qualified investment in

residential energy property between the trust and its

beneficiaries on the basis of the trust’s income allocable to

each.     Section 50(d)(6) provides that section 48(f), as was in

effect on the day before enactment of OBRA, applies for purposes

of calculating the energy tax credit for certain estates and

trusts after OBRA.

     2.      Richter v. Commissioner

     In Richter v. Commissioner, T.C. Memo. 2002-90,2 as here, a

taxpayer claimed an energy tax credit passed through from HEH.

The taxpayer in Richter v. Commissioner, supra, contended that

HEH was entitled to an energy tax credit in 1995 for purchasing

solar energy systems from Mercury Solar and, that, as a

beneficiary of HEH, he was entitled to a pass through of $513 of

HEH’s energy credit in 1995.     The taxpayer’s arrangement with HEH

and Mercury Solar in Richter is substantially similar to



     2
        The taxpayer appealed Richter v. Commissioner, T.C. Memo.
2002-90, to the U.S. Court of Appeals for the Ninth Circuit,
which dismissed the appeal under Fed. R. App. P. 42(b). Richter
v. Commissioner, No. 02-72253 (9th Cir., Oct. 2, 2002).
                               - 8 -

petitioner’s arrangement with HEH and Mercury Solar.3   In

Richter, based on former section 48(f), the legislative history,

and section 1.48-6, Income Tax Regs., we said that an energy tax

credit must be allocated among a trust and its beneficiaries on

the same basis that the trust’s income is allocable to each.       Id.

      The taxpayer in Richter contended that $650 of HEH’s income

was allocable to him in 1995, the year in issue, because HEH was

required to allocate $650 to him under the agreement.   We

disagreed because HEH was required to pay the taxpayer $650 only

if the taxpayer satisfied certain conditions, and we found that

the taxpayer had not satisfied those conditions in 1995.     Id.

      The taxpayer in Richter also contended that an amended 1995

HEH return (prepared after the taxpayer had filed the petition in

that case) established that HEH had allocated $650 of income to

him in 1995.4   We disagreed because we found the HEH amended

return for 1995 and attached Schedule K-1 to be untrustworthy.

Id.   We held that the taxpayer was not entitled to energy tax

credits because he had not shown that any of HEH’s income was

allocable to him or that HEH had allocated any of its investment

in qualifying energy property to him in the year in issue.      Id.



      3
        We discuss petitioners’ argument that this case is
distinguishable from Richter v. Commissioner, supra, below at
par. C.
      4
        There was no evidence in Richter v. Commissioner, supra,
that the HEH amended return for 1995 was ever filed.
                                - 9 -

B.     Whether the Fact That HEH Trustees Had Discretion To
       Allocate HEH Income Satisfies the Sec. 48(f) Requirement
       That HEH’s Income Be Allocable to the HEH Beneficiaries

       Petitioners contend that the fact that the HEH trustees had

discretion to allocate HEH income satisfies the section 48(f)

requirement that HEH’s income be allocable to the HEH

beneficiaries.    Petitioners contend that income is “allocable”

for purposes of section 48(f) if a trustee can allocate income to

a beneficiary, and that thus HEH income was allocable to

petitioner in 1996 because the HEH trustees could have allocated

income and tax credits to him in 1996.

       We do not agree with petitioners’ contention that the fact

that the HEH trustees had discretion to allocate HEH income to

petitioner satisfies the requirement under section 48(f) that

HEH’s income be allocable to him.5      Tax credits are apportioned

between a trust and its beneficiaries “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.      Thus, it is not enough

that the HEH trustees had discretion to allocate income to

petitioner; the trustees must also have allocated HEH income to

him.


       5
        In Richter v. Commissioner, supra, we noted that HEH’s
minutes state that the HEH trustees had discretion to allocate
tax benefits to beneficiaries. However, we did not consider
whether the fact that the HEH trustees had discretion to allocate
HEH income to the taxpayer satisfied the requirement under sec.
48(f) that HEH’s income be allocable to him.
                              - 10 -

C.   Whether Richter v. Commissioner Is Distinguishable

     Petitioners contend that Richter v. Commissioner, supra, is

distinguishable from the instant case because, in Richter, the

taxpayer received no income from HEH, and HEH made no allocation

of income to the taxpayer; in contrast, petitioners contend that

petitioner received $800 from HEH, and HEH allocated income to

petitioner as shown by HEH’s filed 1996 return and attached

amended Schedule K-1.   We conclude that Richter is not

distinguishable for reasons discussed next.

     1.   Whether HEH Allocated Income to Petitioner in 1996

     Petitioners contend that, unlike the taxpayer in Richter to

whom HEH did not allocate income, HEH allocated income to

petitioner in 1996.   Petitioners contend that the amended

Schedule K-1 attached to HEH’s 1996 return establishes that HEH

allocated income to petitioner in 1996.   We disagree.    The 1996

HEH return and the attached amended Schedule K-1 for petitioner

were prepared 9 months after petitioners filed their petition,

apparently in anticipation of trial.   Petitioner’s amended

Schedule K-1 was never sent to him.    Petitioners did not report

any income or other item (other than the energy credit) from HEH

on their 1996 return.   Petitioner’s original K-1, filed with

petitioners’ 1996 return, does not show that there was an

allocation of income; it included only an allocation of the
                                 - 11 -

energy credit.    That is not sufficient to entitle petitioners to

claim the credit.     Richter v. Commissioner, supra.

     We conclude that HEH did not allocate income to petitioner

in 1996.

     2.    Whether Petitioner Received Income From HEH in 1996

     Petitioners contend that, unlike the taxpayer in Richter,

HEH allocated income to petitioner and he received income from

HEH in 1996.     We disagree.   The SEP suggests that, in 1997, HELCO

paid HEH $800 for the installation of petitioner’s solar heating

system, and that HEH credited that amount towards petitioner’s

first payment under the SEP in 1997.      It appears that the payment

was in 1997 and thus petitioner did not receive income (in the

form of a credit to his account) in 1996.     Therefore, petitioner

did not receive income from HEH and thus is not entitled to claim

an energy tax credit in 1996.

     We conclude that petitioners are not entitled to an energy

tax credit of $536 in 1996 by virtue of the $800 payment from

HELCO to HEH in 1997.

D.   Conclusion

     Based on Richter v. Commissioner, supra, and for the

additional reasons stated above, we conclude that no part of

HEH’s income was allocable to petitioner and that HEH did not

allocate any part of its investment in qualifying energy property
                              - 12 -

to petitioner in 1996.   Thus, petitioners are not entitled to the

$536 energy credit claimed on their 1996 return.6

     To reflect the foregoing,

                                              Decision will be

                                         entered for respondent.




     6
        In light of our conclusion, we need not decide whether
the purported energy purchase was, in substance, a sale of solar
equipment to petitioner.
