                                T.C. Memo. 2018-76


                          UNITED STATES TAX COURT



          DONALD R. GOLAN AND SHEILA E. GOLAN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13999-14.                          Filed June 5, 2018.



      Walter D. Channels, for petitioners.

      Jeri L. Acromite, Matthew A. Houtsma, and Miles Friedman, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      VASQUEZ, Judge: With respect to petitioners’ 2011 Federal income tax,

respondent determined a deficiency of $150,694 and an accuracy-related penalty

of $30,138.80 under section 6662(a).1


      1
          All section references are to the Internal Revenue Code (Code) in effect
                                                                      (continued...)
                                         -2-

[*2] After concessions,2 the issues for decision are whether petitioners:

(1) established a basis in solar panels and related equipment for purposes of

claiming an energy credit under sections 46 and 48 and a special allowance for

depreciation under section 168(k); (2) satisfied the requirements of section

168(k)(5); (3) had sufficient amounts at risk under section 465; (4) materially

participated in their solar energy venture under section 469; and (5) are liable for

the accuracy-related penalty under section 6662(a).

                               FINDINGS OF FACT

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

the parties’ first stipulation of facts, second stipulation of facts, and accompanying

exhibits by this reference. Petitioners resided in California when they timely filed

their petition.

       Petitioner Donald R. Golan is a precious metals account representative for

Monex Deposit Co., and petitioner Sheila E. Golan is a fashion consultant. In

2010 Mr. Golan sought an investment that would provide him with extra income.



       1
        (...continued)
for the tax year in issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
       2
        In their petition, petitioners dispute respondent’s determination that they
had “other income” of $100,000. At trial respondent conceded this issue.
                                        -3-

[*3] In furtherance of this goal, a tax attorney acquaintance introduced him to Ken

Salveson.

      Mr. Salveson is a licensed contractor and attorney with a history of

constructing and selling subsidized low-income housing. Sensing a business

opportunity in the solar energy sector, Mr. Salveson formed Solar Energy Equities

LLC (LLC or Mr. Salveson’s LLC). Through the LLC, Mr. Salveson identifies

property owners and offers them discounted electricity in exchange for permission

to install solar panels and related equipment (solar equipment) on their properties

(host properties). The LLC remains the owner of the solar equipment and

temporarily retains the burdens and benefits of ownership (including all resulting

tax credits and rebates). Then the LLC sells the solar equipment (and all rights

and obligations therewith) to a buyer. One such buyer was Mr. Golan, who

purchased solar equipment on three host properties.

Host Property 1

      Tim Mann owns a warehouse in Indio, California (warehouse or host

property 1). With Mr. Salveson’s assistance, Mr. Mann filed an application with

the local utility company for an Interconnection Agreement for Net Energy

Metering from Residential and Commercial Solar or Wind Electric Generating

Facilities of One Megawatt or Less (interconnection agreement) on March 1,
                                         -4-

[*4] 2010. On June 29, 2010, Mr. Mann received a permit from the City of Indio

to install a “solar system” on the warehouse.

      Mr. Salveson’s LLC and Mr. Mann entered into a power purchase

agreement (PPA) dated July 1, 2010. Under the PPA Mr. Mann agreed to

purchase discounted electricity from the LLC, which would generate the electricity

by installing solar equipment on the warehouse. The LLC retained ownership of

the solar equipment and was responsible for any servicing and/or repairs.

Although the PPA had a five-year term, it was contingent on the LLC’s receiving

“certain financial incentives from the local public utility district and/or the United

States Treasury Department.” The PPA prohibited Mr. Mann from assigning the

PPA to another party without the LLC’s consent. Conversely, the LLC could

assign its interest in the PPA to another party with 30 days’ notice to Mr. Mann.

      Mr. Salveson installed the solar equipment on the warehouse in July 2010.

In November 2010 the City of Indio inspected the solar equipment. On December

30, 2010, a representative from the utility company signed the interconnection

agreement. Under this agreement the utility company agreed to connect the solar

equipment on the warehouse to the electric grid. Mr. Mann was required, as a

precondition to connecting the solar equipment to the electric grid, to install “[a]
                                          -5-

[*5] dual meter socket with separate meters to monitor the flow of electricity in

each direction” (bidirectional meter).3

      On a date not established by the record, the utility company informed Mr.

Mann that he was eligible for a rebate of $19,641.38. Mr. Mann assigned the

rebate to Mr. Salveson’s LLC.

Host Property 2

      Mr. Mann also owns a rental property in Indio, California (rental property or

host property 2). With Mr. Salveson’s assistance, Mr. Mann filed an application

with the local utility company for an interconnection agreement on March 1, 2010.

On July 8, 2010, Mr. Mann received a permit from the City of Indio to install a

“solar system” on the rental property.

      Mr. Mann and Mr. Salveson’s LLC entered into a PPA dated August 1,

2010, with terms nearly identical to those of the PPA for host property 1: (1) the

LLC would sell Mr. Mann electricity from solar equipment it installed on the

rental property; (2) Mr. Mann would receive discounted electricity for a five-year

term while the LLC would retain ownership of the solar equipment and the right to

any tax or other financial benefits; (3) Mr. Mann could not assign the agreement to

      3
         Once connected to the grid, the solar equipment could send excess energy
to the utility company. This process, called “net metering”, facilitates keeping the
cost of the solar-generated electricity low.
                                         -6-

[*6] another party without the LLC’s consent, but the LLC could do so with 30

days’ notice; and (4) the LLC would remain responsible for servicing and

repairing the solar equipment.

      On a date not established by the record, Mr. Salveson installed the solar

equipment on the rental property. On September 20, 2010, a utility company

representative signed the interconnection agreement and agreed to connect the

rental property solar equipment to the electric grid. As a precondition Mr. Mann

was required to install a bidirectional meter. That same day the utility company

issued a letter to Mr. Mann stating that he was entitled to a rebate of $21,658.73.

Mr. Mann assigned the rebate to Mr. Salveson’s LLC.

Host Property 3

      Scott and Betty Fisher own a residential property in La Quinta, California

(residential property or host property 3). With Mr. Salveson’s assistance, the

Fishers filed an application with the local utility company for an interconnection

agreement on March 1, 2010.

      The Fishers entered into a PPA with Mr. Salveson’s LLC on July 1, 2010,

with terms nearly identical to those of the PPAs for host properties 1 and 2: (1)

the LLC would sell the Fishers electricity from solar equipment it installed on the

residential property; (2) the Fishers would receive discounted electricity for a five-
                                         -7-

[*7] year term while the LLC would retain ownership of the solar equipment and

the right to any tax or other financial benefits; (3) the Fishers could not assign the

agreement to another party without the LLC’s consent, but the LLC could do so

with 30 days’ notice; and (4) the LLC would remain responsible for servicing and

repairing the solar equipment.

      Mr. Salveson installed the solar equipment on the residential property in

November 2010. On December 30, 2010, a utility company representative signed

the interconnection agreement and agreed to connect the residential property solar

equipment to the electric grid. As a precondition the Fishers were required to

install a bidirectional meter. That same day the utility company issued a letter to

the Fishers stating that they were entitled to a rebate of $16,449.89. The Fishers

assigned the rebate to Mr. Salveson’s LLC.

Sale of Solar Equipment

      In January 2011 Mr. Golan purchased the solar equipment for host

properties 1, 2, and 3 from Mr. Salveson. The sale was effected by several

documents including: (1) a Solar Project Asset Purchase Agreement between Mr.

Golan and Mr. Salveson dated January 10, 2011 (purchase agreement);4 (2) Mr.

      4
      The PPAs indicate that Mr. Salveson’s LLC owned the solar equipment.
However, for reasons not explained in the record, the purchase agreement names
                                                                    (continued...)
                                         -8-

[*8] Golan’s promissory note dated January 15, 2011; (3) Mr. Golan’s Guaranty

dated January 10, 2011; and (4) a Bill of Sale and Conveyance dated January 10,

2011 (bill of sale).

      Under the purchase agreement Mr. Golan agreed to buy the solar equipment

on host properties 1, 2, and 3, in addition to the rights and obligations under the

corresponding PPAs.5 The purchase agreement specified that the “original use” of

the solar equipment “shall commence on or after the Closing Date.” The stated

purchase price was $300,000, which is the sum of (1) a $90,000 downpayment

(due on the closing date); (2) a $57,750 credit for the rebates Mr. Mann and the

Fishers had assigned to Mr. Salveson’s LLC; and (3) Mr. Golan’s promissory note

in the principal amount of $152,250.

      With respect to the promissory note, Mr. Golan promised to pay Mr.

Salveson the principal amount with interest at 2% per annum. Described by Mr.



      4
       (...continued)
Mr. Salveson as the seller rather than the LLC. Neither party has argued that this
discrepancy affects the outcome of this case.
      5
         Technically Mr. Golan agreed to purchase the “Project Assets”, a defined
term meaning “[a]ny and all property, whether tangible or intangible * * * related
to, or used in connection with the generation of electricity at * * * [host properties
one, two, and three] pursuant to the PPA[s]”. As defined in the purchase
agreement, the term includes the solar equipment, the PPAs, and the rights to all
revenues, tax benefits, and other benefits therefrom.
                                        -9-

[*9] Salveson as a “cash flow” instrument, the note had a maturity date of January

14, 2041, but did not have a fixed payment amount. Instead it required Mr. Golan

to pay towards the note all monthly revenue generated by the solar equipment.

The note provided that the “total amount due * * * during any calendar month

shall not exceed the amount of such [m]onthly [r]eceipts.” If the accrued interest

exceeded the monthly receipts in any month, the difference would be “carried

forward and owed by * * * [Mr. Golan] in future months.” Conversely, monthly

receipts in excess of accrued interest and amortized principal would accelerate the

loan’s repayment.

      The note was secured by the solar equipment, and, in the event of a default,

Mr. Salveson agreed to seek recourse against the solar equipment before

exercising any rights or remedies against Mr. Golan. However, the note also

stated that Mr. Golan “shall be liable to pay any deficiency owed to * * * [Mr.

Salveson] in the event * * * foreclosure and sale of the Project Assets is

insufficient to pay all amounts owed to * * * [Mr. Salveson] under this Note.” Mr.

Golan also signed a guaranty, in which he agreed to pay Mr. Salveson the

outstanding balance of the note in the event the “Borrower” failed to pay the note.6


      6
        We infer that Mr. Golan’s guaranty of his own note was an attempt to
ensure that he would be personally liable for the amounts borrowed under the note.
                                        - 10 -

[*10] In addition to the purchase agreement and promissory note, Mr. Golan and

Mr. Salveson signed a bill of sale. In the bill of sale Mr. Salveson acknowledged

that he had received “good and valuable consideration” and was “selling,

assigning, and conveying to * * * [Mr. Golan] all right, title, and interest in and to

the Project Assets”.7 In order to further evidence transfer of the solar equipment,

Mr. Golan signed copies of the PPAs for host properties 1, 2, and 3. Although the

PPAs were dated July 1, August 1, and July 1, 2010, respectively, Mr. Golan

signed them in January 2011.8

After the Sale

      After the January 2011 sale, on a date not established by the record, the

utility company connected the solar equipment on host properties 1, 2, and 3 to the

electric grid. The solar equipment started generating electricity, and Mr. Mann

and the Fishers began making monthly payments pursuant to the PPAs.



      7
         As described supra note 5, the term “Project Assets” refers to the solar
equipment, the PPAs, and the rights to all revenues, tax benefits, and/or other
benefits therefrom.
      8
        The record also contains a Call Option Agreement between Mr. Golan and
Mr. Salveson dated September 22, 2011. Therein Mr. Golan granted Mr. Salveson
an option to purchase the solar equipment for the outstanding balance of the
promissory note. The period during which Mr. Salveson could exercise the option
commenced October 22, 2016, and ended on March 22, 2017. Neither party
mentioned this agreement at trial or on brief.
                                       - 11 -

[*11] Mr. Golan was unable to pay Mr. Salveson the $90,000 downpayment in

2011. Although Mr. Golan was in default of the purchase agreement, Mr.

Salveson continued to honor his end of the contract. At Mr. Golan’s direction,

Mr. Mann and the Fishers made direct payments of their electricity bills to Mr.

Salveson. Mr. Salveson credited these payments towards the promissory note,

which was never amended to account for the unpaid downpayment.

      Mr. Golan made partial payments toward the downpayment to Mr. Salveson

of $75,000 and $5,000 in 2012 and 2013, respectively. Although Mr. Golan was

still in default for the remaining $10,000, Mr. Salveson did not cancel the contract

or otherwise assert any claims for breach of contract.

Petitioners’ Tax Return

      Certified public accountant (C.P.A.) Dennis Klarin prepared petitioners’

2011 joint income tax return.9 Before preparing the return, Mr. Klarin met with

Mr. Golan and Mr. Salveson on four separate occasions. During these meetings

Mr. Klarin and Mr. Salveson extensively discussed Mr. Golan’s investment in the

solar equipment and the tax consequences thereof. Mr. Salveson also provided

Mr. Klarin with copies of the above-referenced agreements and other documents.




      9
          Mr. Klarin has prepared Mr. Golan’s income tax returns since 1977.
                                        - 12 -

[*12] Petitioners attached to their return a Schedule C, Profit or Loss From

Business, on which Mr. Golan purported to be a “consultant” for “Golan Solar

Energy Service”. On the Schedule C petitioners reported no income, claimed

various deductions, including depreciation of $255,000, and stated that they were

using the cash method of accounting.10 On a Form 4562, Depreciation and

Amortization, petitioners specified that the $255,000 deduction was a “[s]pecial

depreciation allowance for qualified property”. Petitioners also attached to their

return a Form 3468, Investment Credit, on which they claimed an energy credit of

$90,000 (30% of $300,000).

Notice of Deficiency

      After selecting petitioners’ return for examination, respondent issued

petitioners a notice of deficiency. Therein respondent disallowed petitioners’

special allowance for depreciation, stating: “We have disallowed the deduction

you claimed for a Section 179 expense because the property does not qualify as

Section 179 property.”11 Respondent also disallowed petitioners’ energy credit,


      10
         The $255,000 figure is the difference between $300,000, petitioners’
purported basis in the solar equipment, and $45,000. Because petitioners also
claimed an energy credit of $90,000, they were required to reduce their basis in the
solar equipment by $45,000 pursuant to sec. 50(c)(1) and (3)(A).
      11
           Respondent disallowed all other Schedule C deductions for “Golan Solar
                                                                      (continued...)
                                         - 13 -

[*13] stating: “Your expenses do not qualify for the Rehabilitation Credit shown

on Form 3468.” In addition, respondent determined that petitioners were liable for

an accuracy-related penalty under section 6662(a).12

                                      OPINION

I.    Burden of Proof

      Generally, the Commissioner’s determination of a deficiency is presumed

correct, and the taxpayer has the burden of proving it incorrect. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).13

      An exception to the general rule exists when the Commissioner raises a new

matter. Rule 142(a); Shea v. Commissioner, 112 T.C. 183, 197 (1999); Tabrezi v.

Commissioner, T.C. Memo. 2006-61. Generally, the Commissioner has raised a


      11
        (...continued)
Energy Service”. Although in their petition, petitioners challenged the
disallowance of these expenses, they did not mention them at trial or on brief. We
therefore deem this issue abandoned and sustain respondent’s determination as to
these deductions. See Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989); Money
v. Commissioner, 89 T.C. 46, 48 (1987).
      12
        Other than the adjustment respondent has conceded, see supra note 2, the
remaining adjustments are computational and will be resolved under Rule 155.
      13
          Sec. 7491(a) shifts the burden of proof to the Commissioner as to any
factual issue relevant to a taxpayer’s liability for tax if the taxpayer meets certain
preliminary conditions. See Higbee v. Commissioner, 116 T.C. 438, 442-443
(2001). Petitioners did not establish that sec. 7491(a) should apply to the instant
case.
                                        - 14 -

[*14] new matter when the Commissioner “attempts to rely on a basis that is

beyond the scope of the original deficiency determination”. Shea v.

Commissioner, 112 T.C. at 191. In particular, a new matter is raised when the

Commissioner’s new theory “either alters the original deficiency or requires the

presentation of different evidence.” Id. (quoting Wayne Bolt & Nut Co. v.

Commissioner, 93 T.C. 500, 507 (1989)). The Commissioner generally must bear

the burden of proof on a new matter. Rule 142(a); Shea v. Commissioner, 112

T.C. at 191.

        In the notice of deficiency respondent disallowed petitioners’ special

allowance for depreciation because the solar equipment was not “Section 179

property”. Respondent disallowed petitioners’ energy credit because their

expenses did “not qualify for the Rehabilitation Credit” under section 47. Given

that petitioners did not claim a section 179 deduction or a section 47 rehabilitation

credit on their return, respondent’s references to these sections were in error.

Respondent now acknowledges that sections 179 and 47 are inapplicable to this

case.

        Respondent nevertheless maintains that petitioners cannot claim the special

allowance for depreciation or the energy credit. On brief respondent asserts the

following grounds for his position: (1) petitioners failed to establish a basis in the
                                        - 15 -

[*15] solar equipment; (2) petitioners have not satisfied certain requirements of

section 168(k)(5); (3) petitioners did not have sufficient amounts at risk under

section 465; and (4) losses and credits attributable to Mr. Golan’s solar energy

venture are subject to the passive activity loss limitations of section 469.

      We first address respondent’s failure-to-establish-basis theory.14 There is

nothing in the notice of deficiency that indicates respondent was disputing the

amount or existence of petitioners’ basis in the solar equipment. Since this theory

necessitates additional evidence regarding the cost of the solar equipment, it is a

new matter for which respondent bears the burden of proof. See Rule 142(a); Shea

v. Commissioner, 112 T.C. at 191, 197.

      With respect to respondent’s second theory, the deficiency notice does not

mention section 168(k)(5) or otherwise state that petitioners failed to satisfy that

provision’s requirements.15 For property to qualify for a 100% special

depreciation allowance under section 168(k)(5), the taxpayer must acquire the



      14
          Respondent first raised this issue in his pretrial memorandum, which was
filed several weeks before trial. Petitioners have neither argued nor established
that the trial of this issue unfairly prejudiced them. See Niemann v.
Commissioner, T.C. Memo. 2016-11, at *14-*15. We therefore find that the issue
was tried by consent. See Rule 41(b).
      15
         Respondent first disputed petitioners’ entitlement to a sec. 168(k) special
depreciation allowance in his answer to petitioners’ amendment to petition.
                                       - 16 -

[*16] property after September 8, 2010, and before January 1, 2012. Additionally,

the original use of the property must commence with the taxpayer after December

31, 2007. Section 179, which respondent erroneously referenced in the notice of

deficiency, does not have these requirements. Because petitioners would need to

introduce additional evidence of the purchase date and the property’s original use,

respondent’s second theory is a new matter for which respondent bears the burden

of proof. See Rule 142(a); Shea v. Commissioner, 112 T.C. at 191, 197.

      The same goes for respondent’s reliance on the at-risk rules of section 465,

which generally requires a taxpayer to deduct losses only to the extent he is

economically or actually at risk for the investment.16 The notice of deficiency

does not mention section 465. Because this theory necessitates additional

evidence pertaining to Mr. Golan’s financing of the solar equipment, it is a new

matter for which respondent bears the burden of proof. See Rule 142(a); Shea v.

Commissioner, 112 T.C. at 191, 197.




      16
          Respondent first raised this issue in his pretrial memorandum, which was
filed several weeks before trial. Petitioners have neither argued nor established
that the trial of this issue unfairly prejudiced them. See Niemann v.
Commissioner, at *14-*15. We therefore find that the issue was tried by consent.
See Rule 41(b).
                                         - 17 -

[*17] Respondent’s reliance on the passive activity loss limitations of section 469

is also a new matter.17 Section 469 generally limits deductions for business

activities in which the taxpayer does not materially participate. As discussed infra,

a taxpayer generally proves material participation by establishing, inter alia, that

he participated in the activity for a specified number of hours. See, e.g., Kline v.

Commissioner, T.C. Memo. 2015-144, at *18-*19. The deficiency notice does not

mention section 469 or question the amount of time Mr. Golan spent on his solar

energy venture. Because this theory requires additional evidence of the amount of

time Mr. Golan participated in his solar energy venture, it is a new matter for

which respondent bears the burden of proof. See Rule 142(a); Shea v.

Commissioner, 112 T.C. at 191, 197.

      Having assigned the burden of proof, we turn to an analysis of the

applicable law as it relates to the issues presented.




      17
          Respondent first raised this issue in his pretrial memorandum, which was
filed several weeks before trial. Petitioners have neither argued nor established
that the trial of this issue unfairly prejudiced them. See Niemann v.
Commissioner, at *14-*15. We therefore find that the issue was tried by consent.
See Rule 41(b).
                                        - 18 -

[*18] II.    Petitioners’ Basis in the Solar Equipment

      We first decide whether and to what extent petitioners have a basis in the

solar equipment. For the reasons stated supra part I, respondent bears the burden

of proof.

      The allowance of depreciation and the energy credit are both dependent on a

taxpayer having a basis in the property. See secs. 38(b)(1), 46, 48(a)(1) (energy

credit), secs. 167(c)(1), 1011(a), 1012 (depreciation); see also Zirker v.

Commissioner, 87 T.C. 970, 979 (1986); sec. 1.168(k)-1(a)(2)(iii), Income Tax

Regs. The taxpayer’s basis in property is generally a question of fact. See Bryant

v. Commissioner, 790 F.2d 1463, 1465 (9th Cir. 1986), aff’g Webber v.

Commissioner, T.C. Memo. 1983-633; Biltmore Homes, Inc. v. Commissioner,

288 F.2d 336, 341-342 (4th Cir. 1961), aff’g T.C. Memo. 1960-53; Wilson v.

Commissioner, T.C. Memo. 1996-418.

      Under section 1012 basis is generally the property’s cost. “Cost” is any

“amount paid for such property in cash or other property.” Sec. 1.1012-1(a),

Income Tax Regs. Although cost basis generally equals the price paid for

property, irrespective of its actual value, this rule might not apply “where a

transaction is based upon ‘peculiar circumstances’ which influence the purchaser
                                        - 19 -

[*19] to agree to a price in excess of the property’s fair market value.” Lemmen v.

Commissioner, 77 T.C. 1326, 1348 (1981) (quoting Bixby v. Commissioner,

58 T.C. 757, 776 (1972)) (holding that a taxpayer’s basis in a cattle herd was

limited to its fair market value at the time of purchase where excess purchase price

was allocable to maintenance contracts).

      Cost generally includes promissory notes issued in exchange for property.

Commissioner v. Tufts, 461 U.S. 300, 307-308 (1983); Crane v. Commissioner,

331 U.S. 1 (1947); see sec. 1.1012-1(g), Income Tax Regs. However, when a

transaction is structured so that, taking economic realities into account, there is no

realistic expectation that the taxpayer will repay the entire nominal debt, the

amount recognized as actual debt should be limited accordingly. See Bridges v.

Commissioner, 39 T.C. 1064, 1077 (1963) (“While it is true that technically

petitioner was personally obligated on his note * * * there was no reason to think

that petitioner could or would have been called upon to pay the note out of his

own funds[.]”), aff’d, 325 F.2d 180 (4th Cir. 1963); Roe v. Commissioner, T.C.

Memo. 1986-510, 52 T.C.M. (CCH) 778 (1986) (discussing cases in which

recourse notes have been held not to be genuine indebtedness for purposes of

determining basis in acquired property), aff’d without published opinion sub nom.
                                        - 20 -

[*20] Haag v. Commissioner, 855 F.2d 855 (8th Cir. 1988), and aff’d without

published opinion sub nom. Sincleair v. Commissioner, 841 F.2d 394 (5th Cir.

1988).

        For purposes of calculating the special allowance and energy credit,

petitioners reported a basis in the solar equipment of $300,000. This amount is the

sum of the following: (1) the $90,000 downpayment; (2) the $57,750 credit for

the utility company rebates the host property owners assigned to Mr. Salveson’s

LLC; and (3) the $152,250 principal amount of Mr. Golan’s promissory note.

Respondent argues that petitioners did not have a basis in the solar equipment for

2011 because no money changed hands between Mr. Golan and Mr. Salveson that

year.

        We first address the $90,000 downpayment. The record establishes that Mr.

Golan did not pay anything towards the downpayment in 2011. Accordingly,

there was no payment in cash or other property during 2011, and petitioners

cannot add the downpayment to their basis for that year. See sec. 1.1012-1(a),

Income Tax Regs.

        We also agree with respondent with respect to the $57,750 credit. The

record establishes the host property owners assigned the utility company rebates to

Mr. Salveson’s LLC prior to the sale of the solar equipment. Mr. Golan neither
                                        - 21 -

[*21] received nor reported the rebates as income. We therefore find on the record

before us that the credit was really a price reduction to account for the LLC’s

receipt of the rebates prior to the sale of the solar equipment to Mr. Golan.

Because the rebates were not part of the solar equipment’s cost to Mr. Golan,

petitioners cannot add the $57,750 credit to their basis in the solar equipment. See

sec. 1012; sec. 1.1012-1(a), Income Tax Regs.

      We reach a different conclusion with respect to Mr. Golan’s $152,250

promissory note. Mr. Golan’s recourse note was issued in exchange for the solar

equipment; petitioners can therefore include the face amount of the note in their

basis. See Commissioner v. Tufts, 461 U.S. at 307-308; Crane v. Commissioner,

331 U.S. at 11; see also sec. 1.1012-1(g), Income Tax Regs. Respondent has not

argued that Mr. Golan cannot reasonably be expected to repay the face amount of

the note.18 See Bridges v. Commissioner, 39 T.C. at 1077; Roe v. Commissioner,

T.C. Memo. 1986-510. Nor has respondent introduced credible evidence that the

solar equipment was overvalued. See Lemmen v. Commissioner, 77 T.C. at 1348.


      18
         Respondent does not contend that Mr. Golan’s promissory note to Mr.
Salveson was, or should be treated as, nonrecourse debt. Cf. Estate of Franklin v.
Commissioner, 544 F.2d 1045, 1049 (9th Cir. 1976) (holding that nonrecourse
debt used to acquire property was not true indebtedness to the extent it exceeded
the property’s fair market value), aff’g 64 T.C. 752 (1975); see also Odend’hal v.
Commissioner, 80 T.C. 588 (1983), aff’d, 748 F.2d 908 (4th Cir. 1984).
                                       - 22 -

[*22] Accordingly, we find that petitioners’ basis in the solar equipment for 2011

was $152,250.

III.   Section 168(k)

       We next decide whether petitioners are entitled to a special allowance for

depreciation under section 168(k). For the reasons stated supra part I, respondent

bears the burden of proof.

       Section 167 allows a deduction for the exhaustion and wear and tear of

property used in a trade or business or held for the production of income.19 To

determine the annual wear and tear of tangible property, the Code generally

requires taxpayers to use the modified accelerated cost recovery system (MACRS)

outlined in section 168. Under section 168(k)(1)(A), the depreciation deduction

provided by section 167 includes a special allowance for qualified property “for

the taxable year in which such property is placed in service”. The special

allowance is a percentage of the property’s adjusted basis; the amount of the

percentage generally depends on when the property was acquired and placed in

service.

       19
          Respondent’s opening brief includes the following requested finding of
fact: “Mr. Golan was interested in investing in the solar property because it would
take very little time and would provide him with income.” We construe this
requested finding of fact as a concession that Mr. Golan held the solar equipment
for the production of income pursuant to sec. 167.
                                         - 23 -

[*23] Section 168(k)(5) provides for a special allowance of 100% of the adjusted

basis of certain qualified property. For purposes of section 168(k)(5), qualified

property is property that meets the following requirements: (1) the property was

MACRS property with an applicable recovery period of 20 years or less, unless it

was certain computer software, water utility property, or qualified leasehold

improvement property; (2) the original use of the property commenced with the

taxpayer after December 31, 2007; (3) the taxpayer acquired the property after

September 8, 2010, and before January 1, 2012; and (4) the taxpayer placed the

property in service before January 1, 2012. Although he appears to concede that

petitioners met the first and second of these requirements,20 respondent contends

that petitioners failed to satisfy the third and fourth requirements.

      We start with the third requirement, namely, that the taxpayer acquire the

property after September 8, 2010, and before January 1, 2012. Respondent argues

that, because Mr. Salveson installed the solar panels on two of the host properties


      20
         Respondent does not address these requirements on brief. See Muhich v.
Commissioner, 238 F.3d 860, 864 n.10 (7th Cir. 2001) (holding that issues not
addressed or developed on brief are deemed waived; it is not the Court’s
obligation to research and construct the parties’ arguments), aff’g T.C. Memo.
1999-192; 330 W. Hubbard Rest. Corp. v. United States, 203 F.3d 990, 997 (7th
Cir. 2000) (same); Larson v. Northrop Corp., 21 F.3d 1164, 1168 n.7 (D.C. Cir.
1994) (declining to reach issues neither argued nor briefed); Jafarpour v.
Commissioner, T.C. Memo. 2012-165 (same).
                                       - 24 -

[*24] in the summer of 2010, he must have acquired them before September 8,

2010. However, section 168(k)(5) applies to “property acquired by the

taxpayer * * * after September 8, 2010”. (Emphasis added.) Respondent has not

cited, and we have not found, any authority for the proposition that the special

allowance is available only to the original purchasers of manufactured property.21

See also sec. 1.168(k)-1(b)(3)(ii)(B), Income Tax Regs. (“If a person initially

acquires new property and holds the property primarily for sale to customers in the

ordinary course of the person’s business and a taxpayer subsequently acquires the

property * * * primarily for the taxpayer’s production of income, the taxpayer is

considered the original user[.]”). Since the record establishes that Mr. Golan

acquired the solar equipment in January 2011, we find that the solar property was

“acquired by the taxpayer * * * after September 8, 2010, and before January 1,

2012”. See sec. 168(k)(5).




      21
          To be sure, if Mr. Salveson or anyone else had used the solar equipment
prior to Mr. Golan’s acquisition of it, petitioners would not be entitled to the
special allowance. See sec. 168(k)(2)(A)(ii) (original use requirement); Weekend
Warrior Trailers, Inc. v. Commissioner, T.C. Memo. 2011-105; sec. 1.168(k)-
1(b)(3)(i), Income Tax Regs. (“[O]riginal use means the first use to which the
property is put[.]”). As explained supra note 20, respondent did not address the
“original use” requirement of sec. 168(k) on brief. Even if respondent had done
so, the record does not establish that anyone used the solar equipment prior to Mr.
Golan.
                                           - 25 -

[*25] Respondent also questions whether petitioners satisfied the fourth

requirement, namely, that the solar equipment was placed in service before

January 1, 2012. Before we address respondent’s argument, we will briefly

summarize the placed-in-service rules.

         “Property is first placed in service when first placed in a condition or state

of readiness and availability for a specifically assigned function”. Sec. 1.167(a)-

11(e)(1)(i), Income Tax Regs. We have held that property is not placed in service

until it is ready and available for full operation on a regular basis for its intended

use. Brown v. Commissioner, T.C. Memo. 2013-275, at *31-*32, *36 (citing

Consumers Power Co. v. Commissioner, 89 T.C. 710 (1987)). For example, in

Brown v. Commissioner, T.C. Memo. 2013-275, the taxpayer sought a section

168(k) special allowance for an airplane he purchased in 2003. He took delivery

of the plane in December 2003 but insisted that the plane undergo various

modifications so that it could serve his particular business needs. Although the

plane was fully functional and available to the taxpayer in December 2003, we

held that it was first placed in service in January 2004 upon the completion of the

modifications. We reasoned that, until the modifications were complete, the

taxpayer could not use the plane as he had intended for his particular business

needs.
                                        - 26 -

[*26] With these principles in mind, we return to respondent’s argument.

Respondent argues that, because Mr. Salveson installed the solar panels on the

host properties in 2010, they were placed in service in 2010.22 We disagree.

Section 168(k)(5) applies to property “placed in service by the taxpayer before

January 1, 2012”. (Emphasis added.) Given that Mr. Golan did not purchase the

solar property until January 2011, we fail to see how the property was ready and

available to him for full operation on a regular basis in 2010. See Brown v.

Commissioner, at *31-*32, *36.

      Furthermore, there is no evidence that the solar equipment was placed in

service by anyone before 2011. The record establishes that the intended use of the

solar property was the provision of discounted electricity through a net metering

arrangement with the utility company. Accordingly, the solar equipment needed

to be connected to the electric grid. The utility company agreed to the

interconnection for one of the host properties on September 20, 2010. With

      22
          In order to qualify for the sec. 168(k)(5) special allowance for the year in
issue, Mr. Golan needed to place the solar property in service in 2011. See sec.
168(k)(1)(A) (authorizing the special allowance “for the taxable year in which
such property is placed in service”); sec. 1.168(k)-1(d)(1), Income Tax Regs. (the
special allowance “is allowable in the first taxable year in which the qualified
property * * * is placed in service by the taxpayer * * * for the production of
income.”); see also Rev. Proc. 2008-54, 2008-2 C.B. 722 (rules similar to the rules
in sec. 1.168(k)-1 for “qualified property” apply for purposes of sec. 168(k) as
presently in effect).
                                         - 27 -

[*27] respect to the other two host properties, the utility company agreed to the

interconnection on December 30, 2010. Each of the three interconnection

agreements required, as a precondition to connecting the solar equipment to the

electric grid, the installation of a bidirectional meter. However, the precise dates

of each bidirectional meter’s installation and the interconnection with the electric

grid are unclear.

      On the basis of these facts, we conclude that the solar equipment was not

ready and available for full operation on a regular basis for its intended use until it

was connected to the electric grid. It is respondent’s burden to show the solar

equipment was connected to the electric grid before 2011, and he has not done

so.23 The foregoing considered, we hold that Mr. Golan placed the solar

equipment in service in 2011 and that petitioners satisfied the requirements of

168(k)(5).

IV.   Section 465

      We next decide whether petitioners were at risk under section 465 with

respect to Mr. Golan’s $152,250 promissory note. For the reasons stated supra

part I, respondent bears the burden of proof.


      23
        From the testimony at trial, we believe the solar equipment began
providing electricity to the host properties in 2011.
                                        - 28 -

[*28] Section 465 limits a taxpayer’s loss deductions only to those amounts for

which the taxpayer is at risk with respect to the activity. A taxpayer is at risk to

the extent of any money and the adjusted basis of any property contributed to the

activity. Sec. 465(b)(1)(A). A taxpayer also is generally considered to be at risk

to the extent that he is personally liable for the repayment of amounts borrowed

for use in the activity. Sec. 465(b)(2)(A). For purposes of the at-risk rules,

however, amounts borrowed from any person having an interest in the activity

(other than an interest as a creditor) are not considered to be at risk. Sec.

465(b)(3).24

      The regulations provide that a person has a prohibited continuing interest

under section 465(b)(3) “only if the person has either a capital interest in the

activity or an interest in the net profits of the activity.” Sec. 1.465-8(b)(1), Income

Tax Regs. A capital interest is defined as “an interest in the assets of the activity

which is distributable to the owner of the capital interest upon the liquidation of

the activity.” Id. subpara. (2).

      24
         Sec. 465(b)(4) provides that “a taxpayer shall not be considered at risk
with respect to amounts protected against loss through nonrecourse financing,
guarantees, stop loss agreements, or other similar arrangements.” Because
respondent did not address the applicability of this provision on brief, we deem it
waived. See Muhich v. Commissioner, 238 F.3d at 864 n.10; 330 W. Hubbard
Rest. Corp., 203 F.3d at 997; Northrop Corp., 21 F.3d at 1168 n.7; Jafarpour v.
Commissioner, slip op. at 11 n.13.
                                        - 29 -

[*29] A person may have an interest in the net profits of an activity even though

he does not possess any incidents of ownership in the activity. Id. subpara. (3).

For example, an employee or independent contractor whose compensation is

wholly or partially determined with reference to the net profits of the activity is

considered to have an interest in the net profits of the activity. Id. Conversely, an

employee or independent contractor whose compensation is based on the gross

receipts of the activity would not be regarded as having a prohibited continuing

interest. See id. subpara. (4), Example (2).

      Section 465(b)(3) contemplates fixed and definite rights or interests that

realistically may cause creditors to act contrary to how independent creditors

would act with respect to their rights under the debt obligations in question.25

Levy v. Commissioner, 91 T.C. 838, 868 (1988). That a creditor was a promoter

      25
          Much of our caselaw on this provision predates the issuance of final
regulations interpreting sec. 465(b)(3) in May 2004. See T.D. 9124, 2004-1 C.B.
901. However, the current definitions of a “capital interest” and “an interest in net
profits” are nearly identical to those in proposed regulations issued by the
Secretary in 1979. See sec. 1.465-8(b), Proposed Income Tax Regs., 44 Fed. Reg.
32239 (June 5, 1979). We have used the text of the proposed regulations as a
guideline in determining whether creditors in transactions had prohibited
continuing interests. See Levy v. Commissioner, 91 T.C. 838, 867 (1988); Larsen
v. Commissioner, 89 T.C. 1229, 1270 (1987), aff’d on this issue sub nom.
Casebeer v. Commissioner, 909 F.2d 1360, 1364-1365 (9th Cir. 1990); Jackson v.
Commissioner, 86 T.C. 492, 529 (1986), aff’d, 864 F.2d 1521 (10th Cir. 1989).
Thus, our pre-2004 caselaw remains useful in interpreting and applying the final
regulations.
                                        - 30 -

[*30] with respect to a particular transaction does not necessarily mean that he has

a prohibited continuing interest in the transaction. Krause v. Commissioner, 92

T.C. 1003, 1024 (1989). We apply these rules to the facts of a transaction as they

exist at the end of each taxable year. Id. at 1025; see also sec. 465(a)(1).

      Respondent contends that Mr. Salveson had a prohibited continuing interest

in the solar equipment activity under section 465(b)(3). We disagree. Respondent

has not identified any provision of Mr. Golan’s and Mr. Salveson’s agreement

under which Mr. Salveson would be entitled to the assets of Mr. Golan’s solar

energy venture upon its liquidation. See sec. 1.465-8(b)(2), Income Tax Regs.

Nor has respondent shown that Mr. Salveson had an interest in the net profits of

Mr. Golan’s solar energy venture.26 See id. subpara (3). To be sure, the

promissory note requires Mr. Golan to pay Mr. Salveson all monthly revenue

generated by the solar equipment towards the note. However, Mr. Salveson’s right

to all monthly revenue is a gross receipts interest, which the regulations permit.

See id. subpara (4), Example (2).

      26
         As stated supra note 8, Mr. Salveson had an option to repurchase the
solar equipment for a five-month period commencing October 22, 2016. Neither
party mentioned the existence of the option at trial or on brief. We deem
respondent’s failure to address the option as a concession that it was not a
prohibited continuing interest. See Muhich v. Commissioner, 238 F.3d at 864
n.10; 330 W. Hubbard Rest. Corp., 203 F.3d at 997; Northrop Corp., 21 F.3d at
1168 n.7; Jafarpour v. Commissioner, slip op. at 11 n.13.
                                          - 31 -

[*31] We therefore hold that Mr. Salveson did not have a prohibited continuing

interest in the solar equipment activity under section 465(b)(3). The fact that Mr.

Salveson may have been a promoter of the transaction does not change this result.

See Krause v. Commissioner, 92 T.C. at 1024. Accordingly, because respondent

has failed to show otherwise, we hold that petitioners were at risk with respect to

Mr. Golan’s $152,250 promissory note.

V.       Section 469

         We next address whether petitioners’ loss and credit attributable to Mr.

Golan’s solar energy venture are subject to the passive activity loss limitations of

section 469. For the reasons stated supra part I, respondent bears the burden of

proof.

         Section 469 generally prohibits using a loss from a passive activity to

reduce income from nonpassive activities during any taxable year.27 Sec. 469(a),

(d)(1). In general, a passive activity is a trade or business in which the taxpayer




         27
         Losses from a passive activity are generally allowed in the year they are
sustained only to the extent of passive activity income. Sec. 469(a)(1)(A), (d)(1).
Credits attributable to a passive activity are generally allowed only to the extent of
the taxpayer’s regular tax liability for the year with respect to all passive activities.
Sec. 469(a)(1)(B), (d)(2).
                                        - 32 -

[*32] does not materially participate.28 Sec. 469(c)(1). A taxpayer materially

participates in an activity when he is involved in the activity on a regular,

continuous, and substantial basis. Sec. 469(h)(1). Participation generally means

all work done in connection with an activity by an individual who owns an interest

in the activity. Sec. 1.469-5(f), Income Tax Regs.

      A taxpayer can establish material participation by satisfying any one of

seven tests provided in the regulations. Sec. 1.469-5T(a), Temporary Income Tax

Regs., 53 Fed. Reg. 5725-5726 (Feb. 25, 1988); see, e.g., Miller v. Commissioner,

T.C. Memo. 2011-219. Of these, petitioners assert that the following test is

relevant to this case:

             (3) The individual participates in the activity for more than 100
      hours during the taxable year, and such individual’s participation in
      the activity for the taxable year is not less than the participation in the
      activity of any other individual (including individuals who are not
      owners of interests in the activity) for such year;

Sec. 1.469-5T(a)(3), Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25,

1988).




      28
          A passive activity generally includes any rental activity. Sec. 469(c)(2).
The Code defines a rental activity as any activity where payments are principally
for the use of tangible property. Sec. 469(j)(8). Respondent does not contend that
Mr. Golan’s arrangement with the host property owners was a rental activity.
                                        - 33 -

[*33] Petitioners maintain that Mr. Golan participated in his solar energy venture

for at least 100 hours in 2011 and that his participation was not less than that of

any other individual.29 Respondent, who bears of burden of proof, has not

established otherwise. We therefore find that petitioners are not subject to the

passive activity loss limitations with respect to Mr. Golan’s solar energy venture

for 2011.

VI.   Accuracy-Related Penalty

      Finally we consider whether petitioners are liable for an accuracy-related

penalty under section 6662(a). Petitioners argue that they should not be liable for

the penalty because they acted on the advice of their return preparer. Respondent

argues that he met his burden of production with respect to the penalty and that

petitioners have not established that they acted with reasonable cause in relying on

their return preparer.

      Section 6662(a) and (b)(2) provides that taxpayers will be liable for a

penalty equal to 20% of the portion of an underpayment of tax attributable to a

substantial understatement of income tax. Section 6662(d)(1)(A) provides that an


      29
         We found Mr. Golan’s testimony credible. See Diaz v. Commissioner,
58 T.C. 560, 564 (1972) (stating that the process of distilling truth from the
testimony of witnesses, whose demeanor we observe and whose credibility we
evaluate, “is the daily grist of judicial life”).
                                        - 34 -

[*34] understatement of income tax is substantial if the amount of the

understatement exceeds the greater of (1) 10% of the tax required to be shown on

the return or (2) $5,000.

      The accuracy-related penalty is not imposed with respect to any portion of

the underpayment as to which the taxpayer shows that he acted with reasonable

cause and good faith. Sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. 438,

448 (2001). Generally, the most important factor is the extent of the taxpayer’s

effort to assess his proper tax liability. Humphrey, Farrington & McClain, P.C. v.

Commissioner, T.C. Memo. 2013-23; sec. 1.6664-4(b)(1), Income Tax Regs.

Reliance upon the advice of a tax professional may establish reasonable cause and

good faith for the purpose of avoiding liability for the section 6662(a) penalty.

See United States v. Boyle, 469 U.S. 241, 250-251 (1985). Whether reasonable

cause exists when a taxpayer has relied on a tax professional to prepare a return

must be determined on the basis of all the facts and circumstances. See

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff’d, 299

F.3d 221 (3d Cir. 2002).

      This Court has stated that reasonable cause and good faith are present where

the record establishes by a preponderance of the evidence that: (1) the taxpayer

reasonably believes that the professional upon whom the reliance is placed is a
                                        - 35 -

[*35] competent tax adviser who has sufficient expertise to justify reliance; (2) the

taxpayer provides necessary and accurate information to the adviser; and (3) the

taxpayer actually relies in good faith on the adviser’s judgment. Id. at 99.

      The Commissioner bears the initial burden of production. Sec. 7491(c);

Higbee v. Commissioner, 116 T.C. at 446-447. The Commissioner’s burden of

production under section 7491(c) includes establishing compliance with the

supervisory approval requirement of section 6751(b).30 Graev v. Commissioner,

149 T.C. ___, ___ (slip op. at 14) (Dec. 20, 2017), supplementing and overruling

in part 147 T.C. 460 (2016); see also Chai v. Commissioner, 851 F.3d 190, 222

(2d Cir. 2017) (citing Higbee v. Commissioner, 116 T.C. at 446). If the

Commissioner satisfies his burden, the taxpayer then bears the ultimate burden of

persuasion. Higbee v. Commissioner, 116 T.C. at 446-447.

      Assuming (without finding) that respondent has met his burden of

production in the instant case, we nevertheless conclude that petitioners carried

their burden with respect to reasonable cause and good faith.31



      30
        Sec. 6751(b) requires written supervisory approval of the initial
determination of certain penalties.
      31
         Because we hold that petitioners acted in good faith and with reasonable
cause, we need not decide whether respondent carried his burden of production
under sec. 7491(c).
                                        - 36 -

[*36] Mr. Klarin, petitioners’ C.P.A., prepared their 2011 joint Federal income tax

return. On the basis of the record before us, we find that Mr. Klarin had sufficient

expertise to justify petitioners’ reliance, that petitioners provided him with

necessary and accurate information, and that petitioners relied upon him in good

faith. At trial respondent’s counsel acknowledged that Mr. Klarin is a “qualified

professional”. We view this statement as a concession that Mr. Klarin had

sufficient expertise to justify petitioners’ reliance. Furthermore, Mr. Klarin

credibly testified that he met with Mr. Golan to discuss the solar venture on at

least four occasions and that petitioners provided him with all the information he

needed to prepare their return. We are also satisfied from Mr. Golan’s credible

testimony that petitioners relied on Mr. Klarin in good faith.

      In sum, the record as a whole establishes that petitioners made a good faith

effort to assess their proper tax liability and reasonably relied on the advice of

their return preparer. We therefore hold that petitioners are not liable for the

accuracy-related penalties.

      In reaching all of our holdings herein, we have considered all arguments

made by the parties, and to the extent not mentioned above, we find them to be

irrelevant or without merit.
                                  - 37 -

[*37] To reflect the foregoing,


                                                Decision will be entered under

                                           Rule 155.
