Quebe (DC OH 1/25/2019) 123 AFTR 2d ¶ 2019-375
A district court has held that an electrical contractor did not qualify for the Code Sec. 179D energy efficient commercial buildings deduction with respect to two of its contracts. In one case, the taxpayer did not establish that it was primarily responsible for designing the property, and in the other, it did not establish that the property was placed in service in the year in which it took the deduction.
Background. Under Code Sec. 179D, a deduction is allowed, subject to a limitation not relevant here, to property owners for an amount equal to the cost of “energy efficient commercial building property” (EECBP) placed in service before Jan. 1, 2018.
Under Code Sec. 179D(c), EECBP is property with respect to which depreciation (or amortization in lieu of depreciation) is allowable and which meets a number of other requirements, including that the property be certified as installed as part of a plan designed to meet certain energy efficiency goals.
Code Sec. 179D(d)(4) directs IRS to issue regs that would allow a government building owner to allocate its Code Sec. 179D deduction to the person primarily responsible for designing the EECBP. No such regs have been promulgated, although IRS published Notice 2008-40, which provides substantial guidance on this rule.
Under Notice 2008-40, Sec. 3.02, a “the person primarily responsible for designing the property (the designer)” of a government-owned building is:
[A] person that creates the technical specifications for installation of energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under Code Sec. 179D). A designer may include, for example, an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under Code Sec. 179D). A person that merely installs, repairs, or maintains the property is not a designer.
Facts. The taxpayers were Mr. and Mrs. Quebe, a married couple filing a joint return. Mr. Quebe was the sole shareholder of QHI, an S corporation electrical contracting company.
QHI claimed Code Sec. 179D deductions for its work installing light fixtures in several buildings at a public school and in five buildings on an Air Force Base, WPAFB.
Taxpayer wasn’t a designer. With respect to the work at the school, the court found that QHI was not the designer and thus was not entitled to the Code Sec. 179D deduction.
IRS argued that QHI merely installed the lighting pursuant to the architect/engineer’s specifications and that therefore the architect/engineer, not QHI, was the designer. IRS cited the testimony of QHI’s chief operating officer that QHI did not design the layout of the fixtures or determine the lighting parameters for a given space at the school. It also noted the detailed lighting plans created by the architects.
The court rejected the Quebes’ argument that Notice 2008-40 expands the deduction beyond what was authorized by Congress. It said that the Notice is entirely consistent with the statutory language stating that the deduction may be allocated to the persons “primarily responsible” for the design. It also said that the Quebes contended that QHI was one of the designers of the lighting system, but they did not cite any evidence showing that its role was any greater than that demonstrated by IRS’s evidence.
Taxpayer didn’t establish that it placed the property in service in the tax year. QHI made several arguments for its being able to take the deduction with respect to lighting fixtures on the Air Force Base. All of the arguments were rejected by the court, which held that none of the lighting fixtures were placed in service in 2009, the tax year for which the Quebes took the deduction.
The Quebes argued that they were entitled to rely on the placed-in-service date stated in the allocation letter they received from a WPAFB maintenance officer. They also argued that the buildings were placed in service as early as 2009, and that the placed-in-service date is the earliest date that a lighting system can perform its assigned function. Alternatively, if the court were to find that the lighting systems were not placed in service in 2009, the Quebes argued that they should be permitted to take the deductions in the correct year.
First, the court said, the letter did not identify any of the five specific buildings at issue. The Quebes claimed that it covered all of the WPAFB buildings. They “essentially argue[d]” that the court should construe all of the work completed at WPAFB as one project and accept the earliest placed-in-service date for any of that work as meeting Code Sec. 179D’s requirements. They did not cite any authority for that proposition, thus creating an extremely broad reading of the statute’s plain language. The statute permits the deduction only for “energy efficient commercial building property placed in service during the tax year.” (Code Sec. 179D(a)) If Congress intended to allow a deduction for EECBP during the tax year that any portion of the project comprising such property is placed in service, it could have done so.
Then the court said that overwhelming evidence contradicted the assertion contained in the letter regarding the place-in-service date. For example, in a “Request for Information” dated Jan. 14, 2010, QHI stated that it “feels that a finish date of mid-March  is unrealistic.”
IRS argued, and the court agreed, that it did not matter whether the WPAFB official was mistaken about the date the property was placed in service, intended to allow the Quebes to take the tax deduction in 2009, or simply did not read the document carefully before signing it. U.S. military personnel cannot authorize taxpayers to claim tax deductions that they would not otherwise receive. “The United States is not bound by unauthorized acts of its agents.” (United States v. Jones & Laughlin Steel Corp. , (CA 6 1986) 804 F.2d 348)
The Quebes lastly argued that, even if the placed-in-service date occurred in a different year, they should be allowed to move the deductions to the appropriate tax year under the Code’s “mitigation provisions” (Code Sec. 1311 – Code Sec. 1314) The court agreed with IRS, however, that the Quebes’ remedy was to file a new refund claim with IRS rather than ask the Court either to issue an advisory opinion as to that entitlement or to empanel a jury to decide which years the property was placed in service. The Government’s waiver of sovereign immunity for suits seeking tax refunds is conditioned on the taxpayer first filing a claim for the refund with IRS. (Code Sec. 7422(a)) “[A] separate claim must be made for each return for each taxable period.” (Reg. § 301.6402-2(d)) The Quebes did not file an administrative claim for this refund for any other year, and thus there was no waiver of sovereign immunity for the Quebes to pursue such a refund before the court.
References: For the energy efficient commercial property deduction, see FTC 2d/FIN ¶ L-3170; United States Tax Reporter ¶ 179D4.