                        T.C. Memo. 2002-90



                      UNITED STATES TAX COURT



                WILLIAM L. RICHTER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19912-98.               Filed April 5, 2002.


     Paul J. Sulla, Jr., for petitioner.

     Jonathan J. Ono, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   Respondent determined a deficiency in

petitioner’s 1995 Federal income tax of $513.   The sole issue for

consideration is whether petitioner is entitled to claim an

energy tax credit in 1995 of $513.
                               - 2 -

                         FINDINGS OF FACT

     The parties have stipulated some of the facts.   The

stipulation of facts is incorporated by this reference.

Petitioner resided in Kaneohe, Hawaii, at the time the petition

was filed.

Solar Water Heating System

     In or about 1994, petitioner investigated new water heating

systems in conjunction with remodeling his home.    As part of his

investigation, petitioner authorized Joseph Miskowiec, a salesman

for Mercury Solar, an organization engaged in the sale of solar

energy heating systems, to conduct an energy audit of

petitioner’s home.   The purpose of the energy audit was to

ascertain the amount of energy used in petitioner’s home, thereby

enabling Mr. Miskowiec to analyze whether petitioner should

install a solar water heating system in his home.   Mr. Miskowiec

determined that petitioner’s hot water needs could be served by a

solar water heating system that would reduce petitioner’s total

monthly utility costs.   Mr. Miskowiec ultimately recommended that

petitioner install a solar water heating system consisting of a

50-gallon storage tank, a 4- by 10-foot solar collector, a

heater, a pump, plumbing, controls, and sensors (collectively,

the heating system).

     As part of his presentation to petitioner, Mr. Miskowiec

offered petitioner two options-–the option to purchase the
                              - 3 -

heating system outright and the option to purchase only the

energy generated by the heating system.    If petitioner chose to

purchase the heating system outright, Mercury Solar would require

payment in full for the installed heating system, and petitioner

would be responsible for all repairs beyond the company contract.

If petitioner chose to purchase only the energy generated by the

heating system, Mercury Solar would sell the heating system to an

environmental group which, in turn, would sell the energy to

petitioner in exchange for his monthly payments.    This option

would provide petitioner with a longer warranty and service

period than an outright purchase would provide.    After reviewing

his options, petitioner, in November 1995, opted to purchase only

the energy generated by the heating system because of the low

cost and the warranty with service.

     After petitioner decided to enter into an energy purchase

agreement, Mr. Miskowiec drafted a proposal, dated November 2,

1995, for petitioner’s heating system, and he submitted the

proposal to Mercury Solar and to Hawaii Environmental Holdings

(HEH), an environmental group, for their review.    The proposal

indicated that HEH’s total investment would be $5,131 and that

its total direct cost would be $2,218.    The proposal also

referenced a Federal tax credit of $513, a State tax credit of

$1,750, and an unexplained amount of $650 labeled “H.E.H”.    Both

Mercury Solar and HEH accepted the proposal.
                               - 4 -

     To implement the proposal, the following documents were

prepared:

     1.   A Solar Energy Purchase Agreement (the purchase

agreement), dated November 2, 1995, by and between HEH as seller

and petitioner as purchaser, in which HEH agreed to sell to

petitioner all of the energy produced from the heating system.

Under the purchase agreement, HEH retained ownership of the

heating system and agreed to sell energy from the heating system

to petitioner and to install, service, maintain, and repair the

heating system during the purchase agreement’s term.   HEH also

agreed to make any improvements necessary to complete the

installation, without any additional cost to petitioner.    HEH

provided a comprehensive warranty for the term of the purchase

agreement, including a promise to perform all required

maintenance without additional cost to petitioner.   The payment

schedule specified in the purchase agreement required petitioner

to pay HEH (a) $46 per month for each of the first 36 months,

except that in months 6, 12, and 36 petitioner was required to

pay $2,263, $650, and $700, respectively; (b) nothing for months

37 through 60; and (c) $20 for month 61.   The payments required

under the agreement totaled $5,151.    The agreement was to be in

effect for a period of 5 years and 1 month from the date on which

the heating system became fully operational.
                               - 5 -

     2.   A Metering and Solar Energy Service Guarantee in which

HEH guaranteed that petitioner’s fossil fuel consumption would

not exceed a specified amount per year (assuming certain

conditions were met) and provided a service guarantee requiring

it to repair and upgrade petitioner’s heating system and to take

other remedial action if petitioner consumed “more fossil fuel

than guaranteed”.

     3.   An Option to Extend Term; Option to Purchase Component/s

in which HEH agreed to remove its equipment at the end of the

purchase agreement but provided petitioner with the option to

extend his purchase agreement for an additional 61-month period

(the second term) “at a reduced monthly rate of 2% of the

existing contracts (sic) smaller monthly energy payment rate”

(i.e., 92 cents per month).   The option agreement also gave

petitioner the option at the end of the second term to purchase

one or more components of the solar energy collection equipment

based on a price to be determined under the option agreement.

     4.   A Memorandum of Heated Solar Water Service Agreement &

Roof Release confirming that petitioner had leased to HEH the

roof of his premises “for purposes including but not limited to

operating the solar water heating system.”

     5.   A Solar Partnership Agreement (the partnership

agreement) in which HEH agreed to pay petitioner $650 upon
                                - 6 -

completion of the initial term’s 12th month in exchange for

allowing HEH to place its equipment on petitioner’s property and

for petitioner’s providing HEH with the names of seven referrals,

writing a letter regarding his experience with the heating

system, and paying all of the required payments on time.

     Although some of the above-described documents do not appear

to have been fully executed, both petitioner and HEH executed the

purchase agreement.    Pursuant to that agreement, the heating

system was installed in petitioner’s home and became operational

on December 7, 1995.    Although there were several instances

during the initial term of the purchase agreement when the system

did not work correctly, HEH arranged for the necessary repairs at

no additional cost to petitioner.

     As of the date of trial, petitioner had made the payments

required under the purchase agreement for the initial term.      At

trial, petitioner testified that he is satisfied with his heating

system, which allegedly has a useful life of 15 to 20 years, and

that he intends to renew his purchase agreement for a second

term.

Petitioner’s Relationship With HEH

     HEH purports to have been created pursuant to a Contract and

Declaration of Creation of Unincorporated Business Organization

(the declaration).    The declaration confers upon HEH’s trustees
                               - 7 -

broad powers “to do anything any citizen may do in any state or

country” and “to construe the meaning and intent of this Contract

and the Trustee(s)’ construction shall be conclusive, legally

binding and will govern.”

     According to certain minutes of Hawaii Environmental

Holdings introduced into evidence at trial, the initial trustee,

Lee Allan Hansen, served as sole trustee from June 1, 1993, until

May 20, 1996.   On May 21, 1996, Lee Allan Hansen appointed two

additional trustees, Cynthia Kay McNeff and James Scott Sparkman

(Mr. Sparkman).   At the time of the trial, Mr. Sparkman claimed

to be the sole trustee of HEH as well as the sole beneficiary of

Mercury Solar, which he described as a business trust.1

     HEH’s minutes record that HEH’s goal was to eliminate “the

use of fossil fuels as an energy source for the planet as well as

the state of Hawaii.”   The minutes also state that the trustees

were to accomplish this goal through a grassroots referral-based

marketing plan, sales of solar energy, and discretionary

allocations of tax benefits to beneficiaries.

     The partnership agreement provided, in relevant part:   “By

signing this document you have become a beneficiary of H.E.H.

You will be given a certificate documenting this fact along with

a description of your rights and privileges as a beneficiary.”



     1
      Mr. Sparkman owned Mercury Solar until 1993. At the time
of the trial, Mr. Sparkman was receiving payments from Mercury
Solar as a technical assistant manager.
                               - 8 -

Mr. Sparkman testified that HEH issued to petitioner a

Certificate of Evidence of Right of Distribution of Hawaii

Environmental Holdings (the certificate).   The certificate

purported to evidence petitioner’s ownership of one beneficial

unit and HEH’s conveyance of the right to claim a Federal

investment credit for $513 and a solar energy tax credit for the

State of Hawaii for $1,750.   The certificate, however, was not

executed by the trustee or by any other agent of HEH.

Relevant Tax Returns

     For the taxable year 1995, HEH filed a Form 1041, U.S.

Income Tax Return for Estates and Trusts, which reported a net

loss of $16,054.   HEH attached to its 1995 return a Schedule C,

Profit or Loss from Business, which reported the operating

results from its sale of solar energy and showed a net profit of

$30,159.

     In connection with its 1995 Form 1041, HEH issued a Schedule

K-1, Beneficiary’s Share of Income, Deductions, Credits, etc., to

petitioner indicating that HEH had allocated $513 to petitioner

as an energy credit.   The Schedule K-1 did not reflect that any

other item was allocable to petitioner for 1995.

     In accordance with the Schedule K-1 issued to him by HEH,

petitioner claimed a passthrough energy credit of $513 on Form

3468, Investment Credit, to his 1995 tax return.   Petitioner also

claimed a passthrough energy conservation tax credit of $1,750 on

his Form N-157, Credit for Energy Conservation, included as part
                               - 9 -

of his 1995 Form N-11, State of Hawaii Individual Income Tax

Return.

Notice of Deficiency and Related Matters

     On October 6, 1998, respondent issued a notice of deficiency

disallowing the Federal energy credit claimed by petitioner on

his 1995 return.   The notice described respondent’s basis for the

determination as follows:

     It is determined that you are not entitled to the
     energy credits you have claimed. It has been
     determined that you are not entitled to receive
     earnings from the trust. Since you do not share in the
     earnings of the trust, you are not allowed to receive
     passthrough credits. Further, it is determined that
     the energy contracts were in substance, a sale of solar
     equipment to you. This determination would also
     prevent the passthrough of any energy credits.

     Petitioner filed his petition contesting respondent’s

determination on December 14, 1998.    Over a year after petitioner

filed his petition in this case, HEH arranged for the preparation

of an amended Form 1041 for 1995, on which HEH claimed total net

income of $315,870 (including net profit from its Schedule C of

$361,983), an income distribution deduction of $316,526 for

distributions allegedly made to HEH’s certificate holders, and a

tentative general business credit of $111,638 consisting of a

current year investment credit of $73,552 and a credit

carryforward of $38,086.2   An amended Schedule K-1 was also


     2
      Mr. Sparkman testified that HEH amended its 1995 return
                                                   (continued...)
                               - 10 -

prepared for petitioner showing an allocation to petitioner of

$650 of nonpassive income and $650 of depreciation.    The

allocation of $650 of nonpassive income was attributable to the

$650 petitioner was scheduled to receive from HEH in late 1996

pursuant to the partnership agreement.

                               OPINION

     Prior to November 5, 1990, individual taxpayers were

permitted to claim a residential energy credit against their

income tax liability.   Sec. 23(a)(2),3 (b)(2), and (c)(2)(A), (5)

(before its repeal by the Omnibus Budget Reconciliation Act of

1990 (OBRA), Pub. L. 101-508, sec. 11801(a)(1), 104 Stat. 1388-

520).    Effective November 5, 1990, OBRA sec. 11801(a)(1) repealed

the residential energy credit for individuals.    The energy

credit, however, continued to be deductible after 1990 as part of

the general business credit available to certain taxpayers,

including certain trusts and estates.    Sec. 38; see also sec.

50(d) (providing that, in calculating the general business credit

authorized by sections 46, 48, and 50, the rules of section 48(f)

relating to certain estates and trusts continue to apply).


     2
      (...continued)
because the original return reported distributions incorrectly as
interest.
     3
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 11 -

     As in effect for 1995, section 38(a)(2) and (b)(1) provides

for a credit against a taxpayer’s income tax in the amount of the

investment credit determined under section 46.   Section 46

provides that the amount of the investment credit, as relevant

here, is the amount of the energy credit.   The amount of the

energy credit is equal to 10 percent of the basis of the energy

property4 placed in service during the taxable year.    Sec.



     4
      Energy property is defined in sec. 48(a)(3) as any
property–-

          (A) which is–-

               (i) equipment which uses solar energy to
          generate electricity, to heat or cool (or provide
          hot water for use in) a structure, * * *

                *    *     *     *      *    *     *

          (B)
                 (i) the construction, reconstruction, or erection
                 of which is completed by the taxpayer, or

               (ii) which is acquired by the taxpayer if the
          original use of such property commences with the
          taxpayer,

          (C) with respect to which depreciation (or
     amortization in lieu of depreciation) is allowable, and

          (D) which meets the performance and quality
     standards (if any) which–-

               (i) have been prescribed by the Secretary by
          regulations (after consultation with the Secretary
          of Energy), and

               (ii) are in effect at the time of the
          acquisition of the property.
                              - 12 -

48(a)(1) and (a)(2)(A).   The energy property must be depreciable,

which requires that the property be used in a trade or business

or held for the production of income.   Secs. 48(a)(3)(A)(i), (C),

176(a).

     A trust is eligible for the energy credit if it places

qualifying energy property in service during the taxable year.

The trust must apportion its basis in the qualifying energy

property among itself and its beneficiaries.   Secs. 38(a),

(c)(3)(D), 46(2), 48(a)(1).   Although there is no current

provision in the Code that governs the apportionment of an

investment in energy property among a trust and its

beneficiaries, section 50(d)5 refers taxpayers to specific

provisions in effect prior to the enactment of OBRA.    One of

those provisions, section 48(f)6 (as in effect on the day before


     5
      Sec. 50(d) provides: “For purposes of * * * [secs. 46, 48,
and 50], rules similar to the rules of the following provisions
(as in effect on the day before the date of the enactment of the
Revenue Reconciliation Act of 1990) shall apply: * * * (6)
Section 48(f) (relating to certain estates and trusts).”
(Emphasis added.)
     6
      Sec. 48(f) (as in effect on the day before the enactment of
OBRA) provides:

          SEC. 48(f). Estates and Trusts.--In the case of an
     estate or trust--

               (1) the qualified investment for   any taxable
          year shall be apportioned between the   * * * trust
          and the beneficiaries on the basis of   the income
          of the * * * trust allocable to each,   and
                                                      (continued...)
                                - 13 -

the enactment of OBRA), provides that the qualified investment

must be apportioned among the trust and its beneficiaries on the

basis of the trust’s income allocable to each.     See also sec.

1.48-6, Income Tax Regs.   In enacting section 48, Congress

recognized that when income is taxed in part to an organization

and in part to its shareholders or beneficiaries, the investment

credit is apportioned among the parties in accordance with their

sharing of income for tax purposes.      S. Rept. 1881, 87th Cong.,

2d Sess. (1962), 1962-3 C.B. 707, 726; H. Rept. 1447, 87th Cong.,

2d Sess. (1962), 1962-3 C.B. 405, 419.

     Respondent disallowed petitioner’s energy credit because he

determined none of HEH’s income was allocable to petitioner

during 1995 and, alternatively, because the purported purchase of

energy was, in substance, a sale of solar equipment to

petitioner.   Because we hold that petitioner has failed to prove

that any of HEH’s income or HEH’s investment in energy property

was allocable to him during 1995, we need not address

respondent’s second argument.


     6
      (...continued)
               (2) any beneficiary to whom any investment
          has been apportioned under paragraph (1) shall be
          treated (for purposes of * * * [secs. 46, 48, and
          50]) as the taxpayer with respect to such
          investment, and such investment shall not (by
          reason of such apportionment) lose its character
          as an investment in new section 38 property or
          used section 38 property, as the case may be.
          [Emphasis added.]
                                - 14 -

     Tax credits are a matter of legislative grace, and

petitioner bears the burden of proving his entitlement to the tax

credit he claimed.7    Rule 142(a);   New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).     Petitioner maintains he is

eligible for the energy credit based upon his status as a

beneficiary of HEH.     The parties do not dispute that, if HEH

placed depreciable solar energy property in service during 1995,

HEH became eligible for the energy credit through its ownership

of that property.     Secs. 38(b)(1), 46(2).   Petitioner asserts

that the apportionment of part of HEH’s energy credit to him was

proper because HEH was required to allocate $650 of HEH’s income

to him under the terms of the partnership agreement and HEH

actually allocated $650 of income to him for 1995, as evidenced

by the amended Schedule K-1 for 1995.

     While it is true that the partnership agreement reflects an

obligation on the part of HEH to allocate and distribute $650 to

petitioner, HEH’s obligation was subject to certain conditions

which required petitioner to identify several referrals, write a

letter of reference, and make his energy payments on time.

Moreover, under the terms of the partnership agreement, HEH was


     7
      Sec. 7491, which is effective for Court proceedings that
arise in connection with examinations commencing after July 22,
1998, places the burden on the Commissioner in certain
circumstances. However, petitioner has not contended, nor is
there evidence, that his examination commenced after July 22,
1998, or that sec. 7491 applies.
                                - 15 -

obligated to pay petitioner $650 only upon completion of the 12th

month of petitioner’s contract, if petitioner complied with his

obligations.

     The record indicates that petitioner did not send the

required reference letter to HEH detailing his experience with

the solar energy heater until November 1996.    Consequently, the

earliest date that HEH was obliged to allocate income to

petitioner was November 1996.    In addition, petitioner produced

no evidence, other than the conflicting testimony of Mr.

Sparkman, that the $650 was ever actually allocated or

distributed to petitioner.

     Similarly, the other documentary evidence petitioner

produced does not adequately support his assertion that HEH

actually allocated income to petitioner for 1995.    Petitioner did

not claim any income from HEH on his 1995 return and has not

filed an amended return.    Furthermore, HEH did not report any

allocation or distribution of income to petitioner on its

original 1995 Form 1041 or on the original 1995 Schedule K-1

issued to petitioner.

     Petitioner introduced at trial what purports to be HEH’s

amended 1995 return and an amended 1995 Schedule K-1 as proof

that HEH earned income and allocated $650 of that income to

petitioner for 1995.    The record does not show, however, whether

HEH’s amended return was actually filed.    Although the amended
                             - 16 -

return claims that HEH had distributable net income and actually

made income distributions of $316,526, the return was not

prepared until after petitioner filed his petition in this case

and is simply not probative or trustworthy.   HEH’s amended return

was signed by Mr. Sparkman less than 1 month prior to trial and

is not corroborated by any credible evidence.   In the absence of

corroborating evidence, we are not required to accept the self-

serving testimony of petitioner or other interested witnesses.

Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485, 512

(1984); Day v. Commissioner, 975 F.2d 534, 538 (8th Cir. 1992),

affg. in part, revg. in part on another ground and remanding T.C.

Memo. 1991-140; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

     Because we are not convinced on this record that any part of

HEH’s income was allocable to petitioner or that HEH allocated a

portion of its investment in qualifying energy property to

petitioner for 1995, we hold that petitioner is not entitled to

the $513 energy credit claimed on his 1995 return.

     We have carefully considered all remaining arguments made by

petitioner for contrary holdings and, to the extent not

discussed, find them to be irrelevant or without merit.

     To reflect the foregoing,



                                        Decision will be entered

                                   for respondent.
