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160 T.C. No. 2

MICHAEL JOHNSON AND CYNTHIA JOHNSON, ET AL., 1

Petitioners

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket Nos.

19973-18, 19975-18,

19978-18, 20001-18.

Filed January 25, 2023.

—————

Ps in these consolidated cases are shareholders in E,

an S corporation that claimed an energy efficient

commercial building property (EECBP) deduction for tax

year 2013, pursuant to I.R.C. § 179D(a). E contracted with

a federal government entity, the VA, to supply and install

components of a federal building’s heating, ventilation, and

air conditioning system. To do so, personnel from E

analyzed existing technical programming specifications,

modified them as necessary, and then programmed the

modified specifications into new, installed components.

Upon E’s request, the VA building’s chief maintenance

officer signed a letter that agreed, pursuant to I.R.C.

§ 179D(d)(4), to allocate to E the full amount of the I.R.C.

§ 179D deduction to which the VA would otherwise be

entitled for the installation of the property.

1 Cases of the following petitioners are consolidated herewith: Brant Lieske

and Laura Lieske, Docket No. 19975-18; Scott Lieske, Docket No. 19978-18; and Todd

Lieske, Docket No. 20001-18.

Served 01/25/23

Held: The installed property at issue in these cases

was EECBP within the meaning of I.R.C. § 179D(c)(1).

Held, further, the chief officer of maintenance and

operations at the VA building properly allocated the

available amount of an I.R.C. § 179D deduction to E as the

person primarily responsible for designing the EECBP.

Held, further, the installed property at issue in these

cases was placed in service in tax year 2013.

Held, further, E is entitled to an I.R.C. § 179D

deduction of $304,640.

—————

Matthew S. Reddington, Selina A. Billington, John H. Dies, Jeremy M.

Fingeret, Rosalind J. Lewis, and Jefferson H. Read, for petitioners.

Jonathan E. Behrens and Kerrington A. Hall, for respondent.

NEGA, Judge: In these consolidated cases, respondent

determined deficiencies in petitioners’ federal income tax and accuracyrelated penalties under section 6662(a) as follows: 2

2 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all

relevant times, and all Rule references are to the Tax Court Rules of Practice and

Procedure.

Michael Johnson and Cynthia Johnson, Docket No. 19973-18

Year

Deficiency

Penalty

§ 6662(a)

2013

$200,827

$40,165.40

2014

456

—

Brant Lieske and Laura Lieske, Docket No. 19975-18

Year

Deficiency

Penalty

§ 6662(a)

2013

$62,607

$12,521.40

Scott Lieske, Docket No. 19978-18

Year

Deficiency

Penalty

§ 6662(a)

2013

$59,317

$11,863.40

2014

3,045

—

Year

Deficiency

Penalty

Sec. 6662(a)

2013

$58,668

$11,733.60

2014

1,720

—

Todd Lieske, Docket No. 20001-18

The deficiencies in these consolidated cases arise from respondent’s

disallowance of a section 179D deduction claimed by Edwards

Engineering, Inc. (Edwards), for the 2013 taxable year. 3 Petitioners are,

directly or indirectly, shareholders of Edwards and reported their

proportionate shares of the claimed section 179D deduction on their

individual tax returns. After concessions, 4 the issue for decision is

whether Edwards is entitled to a deduction of $1,073,237 under section

179D for the 2013 taxable year.

FINDINGS OF FACT

On March 1, 2021, these cases were tried during a Chicago,

Illinois, remote trial session of the Court. The following facts are drawn

from the pleadings, the Stipulation of Facts and the Exhibits attached

thereto, and testimony and Exhibits from trial. At the time of the filing

of each Petition in these consolidated cases, each petitioner resided in

Illinois.

Edwards

Edwards was incorporated in the State of Illinois on October 11,

1978. Edwards is in the business of designing and installing heating,

ventilation, and air conditioning (HVAC) systems and process systems

and is a licensed engineering firm in the State of Illinois. Edwards

employs several professional engineers who are licensed in the State of

Illinois as well as other states.

For the 2013 taxable year Edwards was a small business

corporation within the meaning of section 1361(b)(1) and had an election

in effect to be treated as an S corporation for federal income tax

purposes. In 2013 petitioners Michael Johnson, Brant Lieske, Todd

Lieske, and Scott Lieske owned, individually or as beneficiaries of

trusts, all the shares of Edwards. At all relevant times during the 2013

taxable year, Michael Johnson was a 50% shareholder; the Brant Lieske

Investment Trust was a 16.667% shareholder, the beneficiary of which

was Brant Lieske; the Scott Lieske Investment Trust was a 16.667%

shareholder, the beneficiary of which was Scott Lieske; and the Todd

Lieske Investment Trust was a 16.667% shareholder, the beneficiary of

3 The deficiencies respondent determined against petitioners Michael Johnson

and Cynthia Johnson, Scott Lieske, and Todd Lieske for the 2014 taxable year arose

from the disallowance of prior year minimum tax credits claimed with respect to the

alternative minimum tax reported for the 2013 taxable year.

4 Respondent conceded that petitioners are not liable for an accuracy-related

penalty under section 6662(a) for tax year 2013.

which was Todd Lieske. 5 In March 2012, Edwards entered into a

contract (maintenance contract) with the U.S. Department of Veterans

Affairs (VA), a federal government entity, to provide maintenance

services with respect to the HVAC systems at the Edward Hines, Jr. VA

Hospital (Hines VA).

II.

The Edward Hines, Jr. VA Medical Center

Hines VA is a hospital located in Hines, Illinois. At all relevant

times, Hines VA was owned by the VA. During 2013 and 2014 Michael

J. McCrary was the Chief of Maintenance and Operations at Hines VA

and was involved with the procurement of goods and services for Hines

VA.

The Hines VA campus comprises several buildings, the largest of

which is Building 200, the building at issue in these cases. Building 200

is the main hospital and comprises 15 floors, an occupied basement, a

pipe basement, and multiple mechanical roof penthouses. Building 200

is a critical health care facility and all building systems must be

operational and functional at all times.

III.

The Projects at Hines VA

Under the maintenance contract, Edwards was to “furnish all

labor, material, tools, equipment and parts necessary to complete the

inspection, testing, maintenance, repair and emergency services as

required for the temperature control systems and devices.” The

maintenance contract applied to several buildings on the Hines VA

campus, including Building 200.

A general overview of commercial HVAC systems, such as those

in Building 200, might be helpful. They are highly complicated in

comparison to residential HVAC systems. A commercial HVAC system

is made up of numerous mechanical components, including air handlers,

chillers, cooling towers, water pumps, and air volume systems. The

control system is the “brains” of an HVAC system and controls every

component in the HVAC system. In a commercial HVAC system, the

5 At all relevant times the Brant Lieske Investment Trust, the Scott Lieske

Investment Trust, and the Todd Lieske Investment Trust were grantor trusts. Under

the terms of those trusts, Brant Lieske, Scott Lieske, and Todd Lieske each reported

the income from their respective trusts on Schedules E, Supplemental Income and

Loss, of their Forms 1040, U.S. Individual Income Tax Return, for the 2013 taxable

year.

control system is usually a direct digital control system, which consists

of a front-end computer, controllers or actuators that control every

component, and a series of sensors that measure variables in the

building such as temperature, humidity, and pressure. In general, there

are four aspects of control that integrate into a system: (1) digital inputs,

which are control point switches that start and stop components;

(2) digital outputs, which output information from the system into the

front-end computer; (3) analog inputs, which vary current or voltage to

modulate valves, dampers, and motors; and (4) analog outputs, which

feed back to the front-end computer temperature and pressure

measurements from the sensors. The communications of the control

systems are called the sequence of operations. To achieve automation,

a sequence of operations, which is essentially the logic-based order of

events that the system cycles through in order to accomplish a particular

task (e.g., if temperature drops below 50 degrees, then turn on heating

component), is programmed into the front-end computer to tell the

system how to operate.

Edwards maintained a full-time staff at Hines VA to perform the

services required under the maintenance contract. The Edwards

employees primarily responsible for providing services at the Hines VA

campus were Robert Paul and Ron Carpenter. Mr. Paul’s position at

Edwards was in business promotion in the government sector, and he

was responsible for the overall project management at Hines VA. Mr.

Carpenter was the site supervisor at Hines VA acting on behalf of

Edwards. Mr. Carpenter was an experienced HVAC technician, with

certifications in various automated HVAC control systems, including

Johnson Controls control systems.

S4/S5 Air Handling Units Project

In or around September 2013, Hines VA requested that Edwards

provide a quote for replacing the control systems for the S4/S5 air

handling units in Building 200. At that time the existing American

Auto-Matrix control systems that served the S4/S5 air handling units

and several other floors had become obsolete, and the system was not

functioning properly. The existing system also operated as a standalone

system, so its front-end computer was accessible only from a single

physical location in Building 200 and not via Hines VA’s computer

system. These issues were compounded by the fact that there was a

problem with communication with the service provider representative

for the American Auto-Matrix control system. During its inspection of

the existing systems, Edwards also found that a pump and a valve

actuator were missing. On September 9, 2013, Edwards provided a

quote to Hines VA for the replacement of the control systems for the

S4/S5 air handling units.

Pursuant to a contract modification effective September 6, 2013,

the maintenance contract was modified to increase funding by $99,990

to update the control systems for the S/4/S/5 air handling units in

Building 200 (S4/S5 air handling units project). The statement of work

for the S4/S5 air handling units project called for Edwards to “furnish

all labor, materials, tools, and equipment and parts necessary to replace

the existing Control systems operating S/4/S/5 air handling units and

install new Johnson Controls Building automation system.” On

September 20, 2013, Mr. Paul signed the contract modification on behalf

of Edwards to proceed with work on the S4/S5 air handling units project.

Edwards purchased the equipment for the S4/S5 air handling

units project from South Side Control Supply Co. (South Side). South

Side is a control and parts distributor for commercial HVAC contractors

and is primarily in the business of selling replacement parts and

components for commercial HVAC systems. Edwards also retained

South Side to assist with the programming of the Johnson Controls

control system and to provide printed drawings for the replacement of

the control system because it had the software to produce the drawings.

In order to perform the work for the S4/S5 air handling units

project, Edwards obtained the technical information for the existing

system, including control prints, mechanical prints, and floor plans.

Edwards also obtained the original sequence of operations for the

existing mechanical systems in Building 200, conducted a full

assessment of the existing system, and modified the sequence of

operations as necessary. 6 As part of the S4/S5 air handling units project,

Edwards installed the new Johnson Controls control system equipment

and sensors and replaced the missing pump and actuator. Mr.

Carpenter and Dave Moravec, an employee for South Side, worked

together to program a modified sequence of operations into the front-end

computer for the Johnson Controls control system. To ensure that the

Johnson Controls control system was integrated and properly

functioning, Mr. Carpenter put every aspect of the system through a

6 The original sequence of operations for the existing system was designed by

PFB Architects, LLC, and KJWW Engineering Consultants in 2009 or 2010 as part of

previous HVAC upgrade work for Building 200.

series of simulation tests and reprogrammed any components not found

to be within specifications.

Edwards employees logged a total of 594.5 hours with respect to

the S4/S5 air handling units project, of which 155 hours were logged

during January 2014 and the remainder during 2013. On January 31,

2014, Edwards issued an invoice for $99,990 to the VA for the S4/S5 air

handling units project. On or about June 11, 2014, Edwards received a

payment from the VA of $99,990.

Emergency Replacement of Temperature Control Systems

In or around September 2013, Hines VA requested that Edwards

provide a quote for an emergency replacement of the temperature

control systems for floors 5, 6, 7, and 8 of Building 200. At the time, the

front-end computer for the existing control system related to those floors

was malfunctioning. As mentioned above, the American Auto-Matrix

controls for those systems had become obsolete and either could not be

replaced or required Hines VA to hire a specific service provider, who

had proven to be unreliable. Rather than replace the front-end

computer, Hines VA decided to replace the entire control system related

to those floors of Building 200. During its inspection of the existing

system, Edwards also determined that the isolation rooms, which isolate

a patient to avoid cross-contamination with other patients, were not

functioning. On September 27, 2013, Edwards provided a quote to Hines

VA for the removal of the existing American Auto-Matrix control system

and installation of new Johnson temperature control systems for floors

5, 6, 7, and 8 of Building 200.

Edwards and the VA entered into a contract, effective September

27, 2013, for the emergency replacement of the temperature control

systems for floors 5, 6, 7, and 8 of Building 200 (emergency temperature

control systems project). The statement of work for the emergency

temperature control systems project called for Edwards to “furnish all

labor, tools, materials, installation, transportation, maintenance, and

emergency repair services, necessary to remove [the American AutoMatrix control system] and install new [Johnson Controls] temperature

controls on floors 5, 6, 7, and 8 of Building 200.” On September 27, 2013,

the VA issued to Edwards a notice to proceed with the work on the

project. Pursuant to the notice to proceed, the period of performance for

the contract was not to exceed 30 days and was to be completed by

October 27, 2013.

As with the S4/S5 air handling units project, Edwards purchased

the equipment for the emergency temperature control system project

from South Side and retained South Side to assist with the

programming of the Johnson Controls control system. Edwards

analyzed the original sequence of operations for the existing mechanical

systems in Building 200, inspected the existing system, and modified

the sequence of operations as necessary. As part of the emergency

temperature control systems project, Edwards installed the new

Johnson Controls control system equipment, sensors, and

communication cable and added controls and different pressure sensors

in the nonfunctioning isolation rooms. Mr. Carpenter and Mr. Moravec

programmed the modified sequence of operations into the front-end

computer for the Johnson Controls control system.

Edwards employees logged a total of 522 hours on the emergency

temperature control systems project, of which 88 hours were logged

during January 2014 and the remainder during 2013. On October 31,

2013, Edwards issued two invoices to the VA totaling $4,640 for the

emergency temperature control systems project. On or about October

31, 2013, Edwards received a payment of $4,640 from the VA. On

January 31, 2014, Edwards issued a third invoice to the VA for $200,000

for the emergency temperature control systems project. On or about

March 5, 2014, Edwards received a payment of $200,000 from the VA.

Subcontractor Purchase Orders and Invoices for the

Projects

On September 30 and November 21, 2013, Edwards issued

purchase orders to South Side totaling $25,209.84 for the S4/S5 air

handling units project. On October 28, 2013, and January 17 and

November 1, 2014, South Side issued invoices to Edwards totaling

$22,007.09. On January 10, May 1, and December 26, 2014, Edwards

paid the South Side invoices.

On September 30, 2013, Edwards issued a purchase order for

$123,942 to South Side for the emergency temperature control systems

project. On April 22, 2014, South Side issued an invoice for $123,942 to

Edwards. On June 24, 2014, Edwards paid the South Side invoice. On

October 4, November 13, November 20, and December 20, 2013,

Edwards issued purchase orders to the Cable Co. totaling $1,495.56 for

the emergency temperature control systems project. On October 2,

November 15, November 20, and December 23, 2013, the Cable Co.

issued invoices to Edwards. On December 3, 2013, and March 4, 2014,

Edwards paid the Cable Co. invoices.

IV.

Energy Efficient Commercial Building Tax Deduction Study

Edwards engaged Alliantgroup, LP (Alliantgroup), to conduct an

Energy Efficient Commercial Building Tax Deduction Study (study) for

the 2013 taxable year with respect to Building 200. Alliantgroup is a

tax consultancy and lobbying firm, which, inter alia, maintains a section

179D deduction group that specializes in qualifying and certifying

energy efficient commercial building properties.

On November 15, 2013, Jennifer Marilley, a senior associate

director at Alliantgroup, sent Mr. Johnson an allocation letter and

requested that Edwards have Mr. McCrary sign the allocation letter “as

soon as possible.” Edwards provided the allocation letter to Mr.

McCrary, who signed it on December 17, 2013, on a signature line

labeled “Signature (VA Representative).” The allocation letter stated,

in relevant part, that “the owner of the Building allocates the full federal

income tax deduction available under Section 179D attributable to the

HVAC and hot water systems to Edwards Engineering, Inc., for their

work on the Building.” Attached to the allocation letter was a table

which stated, inter alia, the placed in service date and the cost of the

property installed in Building 200 with respect to the projects at issue.

After obtaining the allocation letter, Alliantgroup proceeded with

conducting the study. Adam Goldberg, an employee of Alliantgroup and

a professional engineer licensed in the State of Illinois, performed the

energy modeling with respect to Building 200. On March 27, 2014,

Stephen Siirtola, an employee of Alliantgroup, performed the field

inspection and prepared a Site Inspection Summary Form. On March

27, 2014, Mr. Goldberg completed and signed a certificate of compliance

related to Building 200 of Hines VA. The certification of compliance

stated, inter alia, (1) that “[t]he total annual energy and power costs of

this building have been reduced by more than 50 percent due to the

installation of the above named systems;” (2) that “[a] qualified

individual has field inspected the property after it has been placed in

service and confirms that the building has met, or will meet, the energysaving targets contained in the design plans and specifications, and that

the field inspections, were performed in accordance with any inspection

and testing procedures that (1) have been prescribed by the National

Renewable Energy Laboratory as Energy Saving Modeling and

Inspection Guidelines for Commercial Building Federal Tax Deductions,

and (2) were in effect at the time of certification;” and (3) that “[t]he

building owner has received an explanation of the energy efficiency

features of the building and its projected annual energy costs.” The

certification of compliance also included a declaration under penalties of

perjury by Mr. Goldberg.

On August 11, 2014, Alliantgroup sent a letter to Hines VA,

addressed to Mr. McCrary, regarding the study. The letter informed

Hines VA that Alliantgroup had completed the study for Building 200

and determined that Edwards has been allocated a section 179D

deduction in the amount of $1,037,237. The letter also provided the

projected annual energy costs for Building 200 and a list of the energy

efficient features installed in Building 200, which included “Efficient Air

Handling Units,” “Energy Recovering Units,” and “Centrifugal Chillers.”

Tax Returns, Notices of Deficiency, and Petitions

On September 15, 2014, Edwards filed a Form 1120S, U.S.

Income Tax Return for an S Corporation, for the 2013 taxable year,

claiming a section 179D deduction of $1,073,237. Petitioners, as direct

or indirect shareholders of Edwards, reported their proportionate shares

of the claimed section 179D deduction on their Forms 1040 for the 2013

taxable year. By notices of deficiency dated July 12, 2018, respondent

disallowed the section 179D deduction claimed by each petitioner.

On October 11, 2018, petitioners in each of these consolidated

cases filed Petitions commencing the cases at Docket Nos. 19973-18,

19975-18, 19978-18, and 20001-18. By Order issued February 25, 2019,

these cases were consolidated for the purpose of pretrial discovery,

motion practice, trial, briefing, and opinion.

OPINION

Jurisdiction and Burden of Proof

Where a notice of deficiency issued to an S corporation

shareholder includes adjustments to both S corporation items and other

items unrelated to the S corporation, we have jurisdiction to determine

the correctness of all adjustments in the shareholder-level deficiency

proceeding. See Winter v. Commissioner, 135 T.C. 238, 245–46 (2010);

see also Deckard v. Commissioner, 155 T.C. 118, 132 n.12 (2020); Hacker

v. Commissioner, T.C. Memo. 2022-16, at *20. We thus have jurisdiction

to determine the correctness of respondent’s adjustments to petitioners’

proportionate shares of Edwards’s claimed section 179D deduction and

other adjustments in the notices of deficiency.

In general, the Commissioner’s determinations set forth in a

notice of deficiency are presumed correct, and the taxpayer bears the

burden of proving them erroneous. Rule 142(a)(1); Welch v. Helvering,

290 U.S. 111, 115 (1933). Moreover, deductions are a matter of

legislative grace, and the taxpayer generally bears the burden of proving

entitlement to any deduction claimed. INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934). A taxpayer claiming a deduction on a federal income tax

return must demonstrate that the deduction is allowable pursuant to

some statutory provision and must substantiate the deduction by

maintaining and producing records sufficient to enable the

Commissioner to determine the taxpayer’s correct tax liability. § 6001;

Higbee v. Commissioner, 116 T.C. 438, 440 (2001); Treas. Reg. § 1.60011(a).

VI.

The Section 179D Deduction

Governing Statutory Provisions

Section 179D provides a deduction with respect to energy efficient

commercial buildings. Ordinarily, when a taxpayer incurs expenses for

improvements to buildings or other property, the taxpayer is required to

capitalize the expenditures and may recover the costs over time through

deductions for depreciation or amortization. See §§ 167, 168, 263.

Section 179D instead allows taxpayers an immediate deduction with

respect to energy efficient commercial building property.

Section 179D(a) provides that “[t]there shall be allowed as a

deduction an amount equal to the cost of energy efficient commercial

building property placed in service during the taxable year.” 7 For

7 As originally enacted in 2005, section 179D applied to property placed in

service after December 31, 2005, and before January 1, 2008. See Energy Policy Act of

2005, Pub. L. No. 109-58, § 1331(a), (d), 119 Stat. 594, 1020, 1024. The Tax Relief and

Health Care Act of 2006, Pub. L. No. 109-432, div. A, § 204, 120 Stat. 2922, 2945,

extended the section 179D deduction to apply to property placed in service before

January 1, 2009. The Emergency Economic Stabilization Act of 2008, Pub. L. No. 110343, div. B, § 303, 122 Stat. 3765, 3845, further extended the section 179D deduction

to apply to property placed in service before January 1, 2014. Congress has since made

section 179D permanent. See Consolidated Appropriations Act, 2021, Pub. L. No. 116260, div. EE, § 102(a), 134 Stat. 1182, 1860 (2020).

purposes of section 179D, section 179D(c)(1) defines “energy efficient

commercial building property” (EECBP) as property:

(A) with respect to which depreciation (or

amortization in lieu of depreciation) is allowable,

(B) which is installed on or in any building which

is—

(i) located in the United States, and

(ii) within the scope of Standard 90.1-2001,[8]

(i) the interior lighting systems,

(ii) the heating, cooling, ventilation, and hot

water systems, or

(iii) the building envelope, and

(D) which is certified in accordance with subsection

(d)(6) as being installed as part of a plan designed to reduce

the total annual energy and power costs with respect to the

interior lighting systems, heating, cooling, ventilation, and

hot water systems of the building by 50 percent or more in

comparison to a reference building which meets the

minimum requirements of Standard 90.1-2001 using

methods of calculation under subsection (d)(2).

With respect to determining the energy and power costs, section

179D(d)(2) directs that “[t]he Secretary, after consultation with the

Secretary of Energy, shall promulgate regulations which describe in

detail methods for calculating and verifying energy and power

consumption and cost, based on the provisions of the 2005 California

Nonresidential Alternative Calculation Method Approval Manual.”

Section 179D(d)(3)(A) requires that any calculation under paragraph (2)

be prepared by qualified computer software. 9

8 Standard 90.1-2001 means Standard 90.1-2001 of the American Society of

Heating, Refrigeration, and Air Conditioning Engineers and the Illuminating

Engineering Society of North America (as in effect on April 2, 2003). § 179D(c)(2).

9 Pursuant to section 179D(d)(3)(B), the term “qualified computer software”

means software (1) for which the software designer has certified that the software

meets all procedures and detailed methods for calculating energy and power

consumption and costs as required by the Secretary; (2) which provides such forms as

required to be filed by the Secretary in connection with energy efficiency of property

and the deduction allowed under this section; and (3) which provides a notice form

which documents the energy efficiency features of the building and its projected annual

energy costs.

With respect to the certifications required under section

179D(c)(1)(D), section 179D(d)(6) directs that “[t]he Secretary shall

prescribe the manner and method for the making of certifications under

this section,” which shall include “procedures for inspection and testing

by qualified individuals described in subparagraph (C) to ensure

compliance of buildings with energy-savings plans and targets.” 10

§ 179D(d)(6)(A) and (B). Additionally, section 179D(d)(5) provides that

each certification required under this section must include an

explanation to the building owner regarding the energy efficiency

features of the building and its projected annual energy costs as

provided in the notice under paragraph (3)(B)(iii).

In the case of EECBP installed on or in property owned by a

federal, state, or local government or a political division thereof, section

179D(d)(4) provides that “the Secretary shall promulgate a regulation to

allow the allocation of the deduction to the person primarily responsible

for designing the property in lieu of the owner of such property.”

Pursuant to section 179D(d)(4), that person (i.e., the person primarily

responsible for designing the property) “shall be treated as the taxpayer

for purposes of this section.”

Generally, if the requirements of section 179D(c)(1) are satisfied,

the amount of the section 179D deduction allowed is equal to the cost of

the EECBP placed in service during the taxable year. 11 § 179D(a).

However, pursuant to section 179D(b), the deduction allowed is not to

exceed the excess, if any, of the product of $1.80 and the square footage

of the building, over the aggregate amount of the section 179D

deductions taken with respect to the building for all prior taxable years.

To the extent that a section 179D deduction is allowed with respect to

any EECBP, the building owner is required to reduce the basis of the

property by the amount of the deduction so allowed. § 179D(e).

Legislative History

The Energy Policy Act of 2005, § 1331(a), 119 Stat. at 1020,

enacted section 179D of the Code. Before the enactment of section 179D,

Pursuant to section 179D(d)(6)(C), individuals qualified to determine

compliance shall be only those individuals who are recognized by an organization

certified by the Secretary for such purposes.

11 If the requirement of subsection (c)(1)(D) is not met, but the property is

otherwise certified in accordance with subsection (d)(6) and any system referred to in

subsection (c)(1)(C) satisfies the energy savings target established by the Secretary

with respect to such system, subsection (d)(1) provides for a partial allowance.

no special deduction was provided for expenses incurred for EECBP.

S. Rep. No. 108-54, at 33 (2003). The Senate Committee on Finance

(Committee), reporting on a prior bill containing text that was

ultimately enacted as section 179D (2003 report), described the reason

for change as follows: 12

The Committee recognizes that commercial

buildings consume a significant amount of energy

resources and that reductions in commercial energy use

have the potential to significantly reduce national energy

consumption. Accordingly, the Committee believes that a

special deduction for commercial building property

(lighting, heating, cooling, ventilation, and hot water

supply systems) that meets a high energy-efficiency

standard will encourage construction of buildings that are

significantly more energy efficient than the norm. The

Committee further believes that the special deduction will

encourage innovation to reduce the costs of meeting the

energy-efficiency standard.

S. Rep. No. 108-54, at 33; accord H. Rep. No. 108-375, at 476–78 (2003)

(Conf. Rep.); Staff of J. Comm. on Tax’n, 109th Cong., General

Explanation of Tax Legislation Enacted in the 109th Congress, JCS-107, at 52–54 (J. Comm. Print 2007); Staff of J. Comm. on Tax’n, 109th

Cong., Description and Technical Explanation of the Conference

Agreement of H.R. 6, Title XIII, The “Energy Tax Incentives Act of

2005,” JCX-60-05, at 78–81 (J. Comm. Print 2005).

We are mindful that a committee report of a previous Congress,

discussing a bill with provisions different from those ultimately enacted

into law, may not necessarily reflect the intent of a subsequent

Congress. See Commissioner v. Engle, 464 U.S. 206, 222–23 (1984).

Consequently, we do not attribute significant interpretive weight to the

2003 report in clarifying textual ambiguities in section 179D.

Interim Guidance

Section 179D contains multiple delegations of rulemaking

authority to the Secretary of the Treasury, but the Secretary has not yet

promulgated any regulations with respect to section 179D. In the

absence of such regulatory guidance, the Internal Revenue Service (IRS)

12 See Energy Tax Incentives Act of 2003, S. 1149, 108th Cong. (2003).

has issued interim guidance in the form of various notices, which

interpret the requirements for a section 179D deduction. I.R.S. Notice

2006-52, 2006-1 C.B. 1175, sets forth a process for obtaining a

certification that the property satisfies the energy efficiency

requirements of section 179D(c)(1)(D) and describes the methods for

calculating and verifying energy and power cost and consumption.

I.R.S. Notice 2008-40, 2008-1 C.B. 725, sets forth guidance interpreting

the requirements for the allocation of section 179D deductions for

government-owned buildings under section 179D(d)(4). The parties’

dispute largely focuses on the proper reading of the Notices, and, in the

analysis that follows, we similarly focus our attention on the Notices. 13

VII.

Whether Edwards Is Entitled to a Section 179D Deduction for the

2013 Taxable Year

Respondent disallowed in full the section 179D deduction

Edwards claimed for the 2013 taxable year with respect to the purported

EECBP installed in Building 200 of Hines VA. We must determine

whether Edwards is entitled to a section 179D deduction for the 2013

taxable year. We note that the parties’ dispute encompasses nearly

every applicable requirement of section 179D.

Energy Efficient Commercial Building Property

Section 179D(c)(1) defines EECBP as depreciable property which

is installed (1) on or in any building located in the United States and

within the scope of Standard 90.1-2001 and (2) as part of the interior

lighting systems, the heating, cooling, ventilation, and hot water

systems, or the building envelope. § 179D(c)(1)(A)–(C). Additionally,

the property must be

certified in accordance with subsection (d)(6) as being

installed as part of a plan designed to reduce the total

annual energy and power costs with respect to the

[relevant] systems of the building by 50 percent or more in

comparison to a reference building which meets the

13 Respondent does not contend that section 179D, which contains mandatory

delegations of authority, cannot be effective in the absence of regulations. See First

Chi. Corp. v. Commissioner, 842 F.2d 180, 182 (7th Cir. 1988), aff’g 88 T.C. 663 (1987);

cf. 15 W. 17th St. LLC v. Commissioner, 147 T.C. 557, 573 (2016) (discussing

discretionary delegations of authority).

minimum requirements of Standard 90.1-2001 using

methods of calculation under subsection (d)(2).

§ 179D(c)(1)(D).

The parties do not dispute that the property at issue was

depreciable property installed as part of the heating, cooling,

ventilation, and hot water systems of Building 200, which is a building

located in the United States and within the scope of Standard 90.1-2001.

See § 179D(c)(1)(A)–(C). The parties, however, disagree as to whether

the property Edwards installed in Building 200 also satisfied section

179D(c)(1)(D). Specifically, respondent argues that the requirements of

section 179D(c)(1)(D) were not satisfied because (1) the property was not

installed as part of a plan to achieve the energy savings target, (2) the

computed energy savings were not derived from the property installed,

and (3) the certification and notice to building owner required by section

179D(d)(5) and (6) were deficient. We disagree with respondent on each

ground and conclude that the property Edwards installed in Building

200 qualifies as EECBP under section 179D(c)(1).

Installed as Part of a Plan

Respondent contends that section 179D(c)(1)(D) requires the

property at issue to have been installed within the context of a plan

designed to achieve the energy savings target. Respondent argues that

the “part of a plan” language in section 179D(c)(1)(D) requires both

intent and specific forethought to achieve the energy savings target.

Respondent asserts that the projects at issue were not the subject of

forethought because they entailed emergency replacement of control

systems. Respondent further asserts that the projects were not designed

to achieve the energy savings target because they were exclusively

aimed at achieving maintenance savings, improved data access, and

improved repair services.

Petitioners, on the other hand, contend that “part of a plan” in

section 179D(c)(1)(D) does not require subjective intent to achieve the

energy savings target. Instead, petitioners assert that, when the statute

is read in its full context, “part of a plan” merely reflects a certification

requirement.

Under petitioners’ reading of the statute, section

179D(c)(1) and (d)(6) together require only that a qualified individual

certify that the property was actually installed as promised and

planned. Petitioners further point out that it is extremely rare for

Congress to impose a subjective intent requirement for a tax incentive

and that respondent’s own guidance omits any reference to such a

requirement.

We need not decide which party has the better reading of the

statutory text standing alone, because the plain text of Notice 2006-52

resolves the issue in petitioners’ favor and respondent continues to stand

by the Notice. Section 4 of the Notice expressly provides that “[a]

certification will be treated as satisfying the requirements of

§ 179D(c)(1) if the certification contains all of the following.” See Notice

2006-52, § 4, 2006-1 C.B. at 1177. The Notice then proceeds to set out

what the certification must contain. See id. § 4.01–.09, 2006-1 C.B. at

1178. Nothing in the paragraphs that follow the quoted text requires a

statement with respect to intent and forethought. 14 In the absence of

such a requirement, we conclude that respondent has conceded that a

certification containing just the information contemplated by Notice

section 4.01 to 4.09 “will be treated as satisfying [all of] the requirements

of § 179D(c)(1),” including the requirements of section 179D(c)(1)(D) (the

provision on which respondent now relies).

See Rauenhorst v.

Commissioner, 119 T.C. 157, 169–73 (2002).

Methods of Calculation and Computed Energy

Savings

Section 179D(c)(1)(D) requires that the property installed be

“certified in accordance with subsection (d)(6) as . . . reduc[ing] the total

annual energy and power costs with respect to the [relevant] systems of

the building by 50 percent or more in comparison to a reference building

which meets the minimum requirements of Standard 90.1-2001 using

methods of calculation under subsection (d)(2).” As mentioned above,

the Secretary has not promulgated regulations on the methods of

calculation. See § 179D(d)(2) (“The Secretary, after consultation with

the Secretary of Energy, shall promulgate regulations which describe in

detail methods for calculating and verifying energy and power

consumption and cost, based on the provisions of the 2005 California

Nonresidential Alternative Calculation Method Approval Manual.”).

Notice 2006-52, however, sets forth interim guidance on the methods for

calculating and verifying energy and power consumption and cost. See

Notice 2006-52, § 3, 2006-1 C.B. at 1177.

14 Nor for that matter does the Notice expressly or implicitly give any indication

concerning any intent and forethought requirement.

Notice 2006-52, section 3.01 states that “[t]he Performance

Rating Method (PRM) must be used to compute the percentage

reduction in the total annual energy and power costs with respect to the

combined usage of a building’s [relevant] systems as compared to a

Reference Building.” To compute the percentage reduction, the PRM

requires the creation of two energy models, a reference building model

and a proposed building model. Id. § 3. The reference building is “a

building that is located in the same climate zone as the taxpayer’s

building and is otherwise comparable to the taxpayer’s building except

that its interior lighting systems, heating, cooling, ventilation, and hot

water systems, and building envelope meet the minimum requirements

of Standard 90.1-2001.” 15 Id. § 3.03. The proposed building is “a

building that contains the interior lighting systems, heating, cooling,

ventilation, and hot water systems, and building envelope that have

been incorporated, or that the taxpayer plans to incorporate, into the

taxpayer’s building but that is otherwise identical to the Reference

Building.” Id. § 3.04(1). The percentage reduction in energy and power

costs is computed by (1) subtracting the energy and power costs for the

relevant components of the proposed building (proposed building energy

and power costs) from the energy and power costs for the same

components of the reference building (reference building energy and

power costs) and (2) expressing the difference as a percentage of the

reference building energy and power costs. Id. § 3.02.

Mr. Goldberg, a qualified individual within the meaning of section

179D(d)(6)(C) and Notice 2006-52, section 5.05, 2006-1 C.B. at 1179,

performed the energy and power cost modeling with respect to Building

200. Pursuant to Notice 2006-52, section 3, Mr. Goldberg created a

reference building model and a proposed building model for Building

200. The reference building model included the baseline standards for

each building component from Standard 90.1-2001 and the PRM

Appendix G of Standard 90.1-2004. The proposed building model

included the HVAC systems that had been incorporated into Building

200 but was otherwise identical to the reference building. The variables

for each building model were entered as inputs in the eQuest software

and the software outputs represented the annual energy and power

consumption of the reference building and the proposed building. The

energy and power consumption for each building model were converted

to energy costs by using the Department of Energy average fuel prices

15 The energy performance of the reference building is determined by applying

the methods for baseline building performance in the PRM Appendix G of Standard

90.1-2004. Notice 2006-52, § 3.03.

for electricity and natural gas. Using these calculations, Mr. Goldberg

determined the proposed building energy and power cost to be $436,810

and the reference building energy and power cost to be $873,810,

resulting in a 50.01% reduction in energy and power costs of Building

200. As a result, Mr. Goldberg certified that Building 200 satisfied the

requisite energy savings under section 179D(c)(1)(D).

Respondent contends that, while petitioners have computed a

reduction in energy costs that purports to satisfy the energy savings

target, they have not established or otherwise verified that any of those

computed energy savings resulted from the property Edwards installed

in Building 200. Respondent instead argues that the computed energy

savings rely exclusively on the property installed in Building 200 as part

of the original HVAC upgrade in 2011 to achieve the energy savings

target. Respondent asserts that, if the specific components not installed

by Edwards are removed from the computed energy savings, Building

200 would fail to achieve the energy savings target. Respondent further

argues that, in any event, the property Edwards installed in Building

200 had no associated energy savings because it was merely a

replacement of one control system for another. We disagree.

Pursuant to Notice 2006-52, the percentage reduction in the total

annual energy and power costs of a building is calculated by using a

comparison between the proposed building and the reference building.

The proposed building is broadly defined as containing the relevant

systems “that have been incorporated, or that the taxpayer plans to

incorporate,” into the building. Notice 2006-52, § 3.04(1). Under this

definition, the systems and components included in the proposed

building are not limited to those incorporated into the building within a

specific timeframe or by a specific contractor. Thus, in essence, Notice

2006-52 interprets section 179D(c)(1)(D) as contemplating a comparison

between the proposed building as it stands and the reference building.

Accordingly, we find that the proposed building in this case properly

included all the HVAC systems and components that have been

incorporated into Building 200.

Since the property incorporated into Building 200 reduced the

total annual energy and power costs with respect to the relevant systems

of the proposed building by 50% or more in comparison to those of the

reference building, the requirements of section 179D(c)(1)(D) and Notice

2006-52 have been met.

Certifications and Notice to Building Owner

Before a taxpayer may claim a section 179D deduction with

respect to property installed on or in a commercial building, the

taxpayer must obtain a certification with respect to the property. Notice

2006-52, § 4, 2006-1 C.B. at 1177. Section 179D(c)(1)(D) requires that

EECBP be “certified in accordance with subsection (d)(6).” Section

179D(d)(6) directs that “[t]he Secretary shall prescribe the manner and

method for the making of certification under this section” and “shall

include as part of the certification process procedures for inspection and

testing by qualified individuals . . . to ensure compliance of buildings

with energy-savings plans and targets.” § 179D(d)(6)(A) and (B).

Section 179D(d)(5) further requires each certification to include an

explanation to the building owner regarding the energy efficiency

features of the building and its projected annual energy costs.

Notice 2006-52, section 4 prescribes the manner and method for

the making of certifications in accordance with section 179D(c)(1) and

(d)(6). Pursuant to Notice 2006-52, section 4, a certification will be

treated as satisfying the requirements of section 179D(c)(1) if the

certification contains, inter alia:

.05 A statement by the qualified individual that field

inspections of the building performed by a qualified

individual after the property has been placed in service

have confirmed that the building has met, or will meet, the

energy-saving targets contained in the design plans and

specifications, and that the field inspections were

performed in accordance with any inspection and testing

procedures that (1) have been prescribed by the National

Renewable Energy Laboratory (NREL) as Energy Savings

Modeling and Inspection Guidelines for Commercial

Building Federal Tax Deductions and (2) are in effect at the

time the certification is given.

.06 A statement that the building owner has

received an explanation of the energy efficiency features of

the building and its projected annual energy costs.

....

.08 A list identifying the components of the

[relevant] systems, and building envelope installed on or in

the building, the energy efficiency features of the building,

and its projected annual energy costs.

Respondent contends that the certification and the notice to

building owner in this case do not satisfy the requirements of section

179D(d)(5) and (6) and Notice 2006-52, section 4.

Specifically,

respondent asserts that the certification and the notice to building

owner are deficient because they do not list the energy efficient features

of Building 200. Respondent further asserts that the field inspection

was not performed in accordance with NREL procedures because the

site inspection summary form does not contain information that would

enable someone to verify that the projects complied with the mandatory

provisions of Standard 90.1-2001. We disagree on both grounds.

Mr. Goldberg provided Edwards the certification of compliance,

dated March 27, 2014, with respect to Building 200. Attached to Mr.

Goldberg’s certification was a list of the components of the HVAC system

installed in Building 200, which included air handling units, heating

coils, and variable frequency drive pumps. Similarly, the notice to

building owner, dated August 11, 2014, provided a list of the energy

efficient features installed in Building 200, which included efficient air

handling units, energy recovering units, and centrifugal chillers. At

trial Mr. Goldberg credibly testified:

In some cases, energy-efficient features will be separate

functions or operational characteristics of the energyefficient components, but in other cases, those components

and those features are interchangeable. And so when they

speak . . . to energy-efficient components, energy-efficient

features, there is overlap there, that this can account for

both clauses of that statement.

We agree with Mr. Goldberg that, in this case, the components

installed in Building 200 also represent the energy efficient features of

Building 200. Accordingly, we find that the certification and the notice

to building owner in this case listed both the components and energy

efficient features of Building 200.

With respect to the field inspection, respondent correctly points

out that one of the two objectives of the NREL inspection and testing

procedures is to “[v]erify that the energy efficient properties qualifying

for the tax deductions in the taxpayer’s building meet the necessary

mandatory provisions of Standard 90.1-2001.” M. Deru, Technical

Report NREL/TP-550-40467, Energy Savings Modeling and Inspection

Guidelines for Commercial Building Federal Tax Deductions 10 (2d ed.

May 2007), https://www.nrel.gov/docs/fy07osti/40467.pdf. Notice 200652, section 4.05, however, does not expressly require the field inspection

certification itself to contain information that would enable someone to

verify that the projects complied with the mandatory provisions of

Standard 90.1-2001. Instead, Notice 2006-52, section 4.05 requires only

that the certification include “[a] statement by the qualified individual

. . . that the field inspections were performed in accordance with any

inspection and testing procedures that (1) have been prescribed by the

[NREL] as Energy Savings Modeling and Inspection Guidelines for

Commercial Building Federal Tax Deductions and (2) are in effect at the

time the certification is given.” Mr. Siirtola, a qualified individual

within the meaning of Notice 2006-52, sections 4 and 5.05, performed

the field inspection with respect to Building 200 on March 27, 2014. On

the site inspection summary form, dated March 27, 2014, Mr. Siirtola

indicated that the projects (1) complied with the mandatory provisions

of Standard 90.1-2001 and (2) matched the provided construction

drawings, including controls.

Furthermore, a statement in the

certificate of compliance for Building 200 satisfied the requirements of

Notice 2006-52, section 4.05. Accordingly, we conclude that the field

inspection and certification of the field inspection satisfied the

requirements of Notice 2006-52, section 4.05.

On the basis of the foregoing, we conclude that the certification of

compliance and the notice to building owner in this case satisfied the

requirements of section 179D(c)(1) and Notice 2006-52, section 4.

Allocation of the Section 179D Deduction to Edwards

Government entities, which do not benefit from tax deductions,

are allowed to allocate the section 179D deduction “to the person

primarily responsible for designing the property in lieu of the owner of

such property.” § 179D(d)(4); see also United States v. Quebe, No. 3:15cv-294, 2019 WL 330852, at *4 (S.D. Ohio Jan. 25, 2019). The Secretary

has not “promulgated a regulation to allow the allocation of the [section

179D] deduction,” as directed by section 179D(d)(4). Notice 2008-40,

however, sets forth interim guidance on the requirements for the

allocation of the section 179D deduction with respect to governmentowned buildings. See Notice 2008-40, § 3, 2008-1 C.B. at 725.

Respondent argues that Edwards could not be allocated the

section 179D deduction because it was not the person primarily

responsible for designing the property installed in Building 200.

Respondent further argues that, even if Edwards were the person

primarily responsible for designing the property, Hines VA did not

properly allocate the section 179D deduction to Edwards because the

allocation letter does not conform to the requirements of Notice 2008-40,

section 3.04. We disagree with respondent on both grounds.

Person Primarily Responsible for Designing the

Property

Section 179D does not define the “person primarily responsible

for designing the property.” Notice 2008-40, section 3.02, however,

defines a “designer” as “a person that creates the technical specifications

for installation of [EECBP]” and may include, for example, an architect,

engineer, contractor, environmental consultant or energy services

provider who creates the technical specifications for a new building or

any addition to an existing building that incorporates energy efficient

commercial building property. Notice 2008-40, § 3.02. Section 3.02

further clarifies that “[a] person that merely installs, repairs, or

maintains the property is not a designer.” Id.

Relying on Notice 2008-40, respondent argues that Edwards was

not a “designer” of the EECBP installed in Building 200 because it did

not create any technical specification for the installation of the property

and the scope of its work was limited to installing, repairing, or

maintaining the HVAC systems. Respondent thus contends that

Edwards is not eligible to be allocated the section 179D deduction. We

disagree.

We find that the work Edwards performed with respect to the

projects at issue involved more than mere installation, repair, or

maintenance. The statement of work for both the S4/S5 air handling

units project and the emergency temperature control system project

called for Edwards to replace the existing American Auto-Matrix control

systems and install new Johnson Controls building automation systems.

In order to install the new Johnson control systems, Edwards analyzed

the original sequence of operations to determine how the existing

systems were intended to operate, inspected the existing systems to

determine how they were actually operating in comparison to the

original sequence of operations (i.e., to identify any failures or ad hoc

changes made to the original sequence of operations), and modified or

changed the sequence of operations as necessary to better operate the

systems. Mr. Carpenter and Mr. Moravec programmed the modified

sequence of operations into the new Johnson control system. Mr.

Carpenter then conducted simulation tests on every aspect of the system

and reprogrammed any aspects of the system not found to be within

specifications.

We conclude that, in modifying the sequence of

operations to better operate the systems and programming the modified

sequence of operations into the new Johnson control systems, Edwards

created the technical specifications for the installation of the EECBP at

issue. On the basis of the foregoing, we conclude that Edwards was a

“designer” within the meaning of Notice 2008-40, section 3.02 for the

projects at issue.

Respondent further argues that South Side, and not Edwards,

was the person primarily responsible for designing the property

installed in Building 200. Respondent asserts that South Side devoted

significant time to designing the property, performed engineering

services in connection with the installation of the property, programmed

the control systems, and created all the drawings used by Edwards to

install the control systems in Building 200. Respondent further asserts

that the engineering work South Side performed accounted for more

than half of the costs Edwards incurred with respect to the projects.

Thus, respondent asserts that only South Side may be allocated the

section 179D deduction.

We find that respondent is overstating the role that South Side

played with respect to the EECBP installed in Building 200. South Side

is a control and parts distributor for commercial HVAC contractors and

is primarily in the business of selling replacement parts and components

for commercial HVAC systems. South Side is not an architecture firm

and does not employ any licensed engineers. Most of the amount

Edwards paid to South Side with respect to the projects at issue was for

the control systems equipment and components.

Moreover, a

representative of South Side testified that South Side’s role in projects

is typically to implement the contractor’s design for an HVAC system by

doing the technical programming of the system. While South Side also

assisted in the technical programming of the controls and created

drawings with respect to the projects, South Side was merely a

subcontractor acting at the direction of Edwards and implementing

Edwards’s design. Furthermore, neither section 179D nor Notice 200840 prohibits the use of a subcontractor.

Assuming arguendo that both Edwards and South Side were

“designer[s]” of the EECBP installed in Building 200, Notice 2008-40

gives the building owner the discretion on how to allocate the section

179D deduction. Notice 2008-40, section 3.01, provides that the building

owner “may allocate the § 179D deduction to . . . the designer.” Notice

2008-40, section 3.03 states that if there is “more than one designer. . .

the owner of the building shall (1) determine which designer is primarily

responsible and allocate the full deduction to that designer, or (2) at the

owner’s discretion, allocate the deduction among several designers.”

Pursuant to the allocation letter in this case, Hines VA allocated the full

amount of the section 179D deduction to Edwards. Thus, absent any

evidence to the contrary, we conclude that Hines VA determined

Edwards to be the person primarily responsible for designing the

EECBP installed in Building 200. Accordingly, we find that Edwards

was the person primarily responsible for designing the EECBP installed

in Building 200.

Form of Allocation

Section 179D does not prescribe any particular formal

requirements for the allocation of the deduction. Notice 2008-40, section

3.05, 2008-1 C.B. at 726, however, states that “[b]efore a designer may

claim the § 179D deduction with respect to property installed on or in a

government-owned building, the designer must obtain the written

allocation described in section 3.04.” Pursuant to Notice 2008-40,

section 3.04, an allocation of the section 179D deduction will be treated

as satisfying the requirements of this section if the allocation contains,

inter alia:

(4) The cost of the property;

(5) The date the property is placed in service;

(6) The amount of the § 179D deduction allocated to

the designer; [and]

(7) The signatures of the authorized representatives

of both the owner of the government-owned building and

the designer or the designer’s authorized representative.

Alliantgroup prepared and drafted the allocation letter Edwards

obtained in this case. On November 15, 2013, petitioner Michael

Johnson signed the allocation letter on behalf of Edwards and, on

December 17, 2013, Mr. McCrary signed the allocation letter on behalf

of Hines VA. The allocation letter stated, in relevant part, that “the

owner of the Building allocates the full federal income tax deduction

available under Section 179D attributable to the HVAC and hot water

systems to Edwards Engineering, Inc., for their work on the Building.”

Attached to the allocation letter was a table which showed, inter alia,

the placed in service date and the cost of the property installed in

Building 200 with respect to the projects at issue.

Respondent argues that the allocation letter does not conform to

the requirements of Notice 2008-40, section 3.04, because it does not

state the dollar amount of the deduction allocated to Edwards.

Respondent asserts that such a requirement is necessary for building

owners to be able to calculate the aggregate amount of deductions taken

with respect to a building for purposes of future allocations. We

disagree.

Notice 2008-40, section 3.04, requires the allocation letter to state

only the “amount” of the section 179D deduction allocated to the

designer. We find that the allocation letter Edwards obtained from

Hines VA did include the “amount” of the section 179D deduction

allocated to Edwards. Pursuant to the allocation letter, Edwards was

allocated the full amount (i.e., 100%) of the section 179D deduction with

respect to Building 200. If Notice 2008-40 required the allocation letter

to state the “dollar amount” of the allocation, then it would have so

stated. Moreover, Hines VA was issued a notice to building owner, dated

August 11, 2014, which informed it of the dollar amount of the section

179D deduction Edwards claimed. Thus, in any event, Hines VA was

provided the information necessary to account for any future section

179D allocations with respect to Building 200.

Next, respondent argues that the allocation letter does not

conform to the requirements of Notice 2008-40, section 3.04 because it

was not signed by an “authorized representative” who had actual

authority to bind Hines VA. We disagree. As mentioned above, Mr.

McCrary signed the allocation letter on behalf of Hines VA. During 2013

and 2014 Mr. McCrary was the Chief of Maintenance and Operations

and a contracting officer’s representative at Hines VA. At trial Mr.

McCrary testified that at the time he signed the allocation letter, he

believed he had “the authority to sign” the document on behalf of Hines

VA. Mr. McCrary, however, further testified that he does not have the

authority to execute contracts on behalf of Hines VA. As an initial

matter, the allocation of the section 179D deduction in this case does not

appear to constitute a contract. See, e.g., United States v. Stump Home

Specialties Mfg., Inc., 905 F.2d 1117, 1121–22 (7th Cir. 1990) (describing

the preexisting duty rule). Furthermore, the record is devoid of any

evidence indicating that Hines VA has attempted to reverse or

invalidate the allocation of the section 179D deduction to Edwards on

the basis of any purported lack of authority. Accordingly, on the basis

of the record before us, we find that the allocation letter was signed by

an authorized representative of Hines VA.

On the basis of the foregoing, we conclude that the allocation

letter Edwards obtained from Hines VA with respect to the EECBP

installed in Building 200 satisfied the requirements of section

179D(d)(4) and Notice 2008-40.

Whether the EECBP Was Placed in Service in 2013

Section 179D allows a deduction for “the cost of energy efficient

commercial building property placed in service during the taxable year.”

§ 179D(a). Consistent with the statute, Notice 2008-40, section 3.01

states that “[t]he deduction will be allowed to the designer for the

taxable year that includes the date on which the property is placed in

service.”

Section 179D does not define when EECBP is “placed in service.”

However, because EECBP is property “with respect to which

depreciation . . . is allowable,” we turn to the statutes and rules

governing depreciable property to determine when property is “placed

in service” for section 179D purposes. §§ 179D(c)(1)(A), 179(a), 167; see

Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152, 159 (1993)

(interpreting tax statute in light of presumption that Congress was

aware of settled meaning of term of art used); Sorenson v. Sec’y of Treas.,

475 U.S. 851, 860 (1986) (applying canon that “identical words used in

different parts of the same act are intended to have the same meaning”).

Section 167 allows a depreciation deduction for the exhaustion, wear

and tear, or obsolescence of property used in a trade or business.

Treasury Regulation § 1.167(a)-10(b) provides that “[t]he period for

depreciation of an asset shall begin when the asset is placed in service.”

In general, property is placed in service when it is “first placed in a

condition or state of readiness and availability for a specifically assigned

function, whether in a trade or business, in the production of income, in

a tax-exempt activity, or in a personal activity.” Treas. Reg. §§ 1.167(a)11(e)(1)(i), 1.179-4(e). Property is thus deemed to have been placed in

service at the time when it functionally could have been used, rather

than when it was actually used. See Waddell v. Commissioner, 86 T.C.

848, 897 (1986), aff’d, 841 F.2d 264 (9th Cir. 1988); Piggly Wiggly S., Inc.

v. Commissioner, 84 T.C. 739, 746–47 (1985), aff’d, 803 F.2d 1572 (11th

Cir. 1986).

The parties agree that the specifically assigned function of the

EECBP (i.e., the control systems) Edwards installed in Building 200 was

to operate the various components of the HVAC system to heat and cool

the premises. Petitioners assert that the property Edwards installed in

Building 200 was placed in service during the 2013 taxable year. In

contrast, respondent argues that the control systems could not be ready

and available for their specifically assigned function in 2013 because

(1) South Side did not supply the Johnson controls to Edwards until

2014, (2) Edwards employees logged hours in 2014 related to the

installation and programming of the control systems, and (3) Edwards

admitted in correspondence sent in 2014 that the projects were not yet

finished. Thus, respondent contends that the EECBP was not placed in

service during the 2013 taxable year.

We are not persuaded by the evidence respondent relies on to

support his position. Respondent relies on several invoices created by

South Side to support his assertion that certain controls were not

supplied to Edwards until 2014. However, an employee of South Side

testified at trial that those invoices were not issued to clients but rather

were created for the purpose of tracking inventory, which is why the

invoices reflect a zero balance owing. With respect to the hours logged

in 2014, Edwards employees credibly testified that the work entries

shown for Building 200 in 2014 were related to “warranty, fine-tuning,

and callbacks.” Lastly, although an email in 2014 generally indicates

that the emergency temperature control project may not have been

finished, it does not rebut testimony offered by petitioners that the

remaining work related to warranty, fine-tuning, and callbacks. See

Sealy Power, Ltd. v. Commissioner, 46 F.3d 382, 394 (5th Cir. 1995)

(observing that testing property for potentially defective performance

does not preclude property’s having already been placed in service), aff’g

in part, rev’g in part T.C. Memo. 1992-168.

On the other hand, there is substantial evidence in the record

indicating that the EECBP Edwards installed in Building 200 was

placed in service during the 2013 taxable year. The allocation letter,

which was signed by Mr. McCrary, states that the property installed for

the S4/S5 air handling units projects was placed in service in November

2013 and the property installed for the emergency temperature control

systems project was placed in service in December 2013. Mr. McCrary

further testified at trial that he believed the file reference to those placed

in service dates to be accurate. Moreover, Mr. Paul and Mr. Carpenter,

the Edwards employees primarily responsible for providing services for

the projects at Hines VA, testified that the projects were completed and

operational in 2013. Thus, all persons with firsthand knowledge agree

that the projects were completed and the EECBP’s was operational in

2013. Furthermore, Mr. Paul testified that Edwards typically sends

invoices within 30 to 45 days after a project is completed. Consistent

with the EECBP’s being placed in service during the 2013 taxable year,

Edwards issued to the VA invoices for the S4/S5 air handling units

project and the emergency temperature control systems project on

January 31, 2014. On the basis of the foregoing, we conclude that the

EECBP Edwards installed in Building 200 for the projects at issue was

placed in service during the 2013 taxable year.

Amount of the Section 179D Deduction

Under section 179D(a) the amount of the deduction allowed is

“equal to the cost of energy efficient commercial building property placed

in service during the taxable year.” Section 179D(b), however, limits the

deduction allowed with respect to any building for any taxable year to

the excess (if any) of the product of $1.80 and the square footage of the

building, over the aggregate amount of section 179D deductions taken

with respect to the building for all prior taxable years. Thus, the amount

of the section 179D deduction allowed is equal to the lesser of (1) the cost

of EECBP placed in service during the taxable year and (2) the

maximum amount of deduction determined under section 179D(b).

Hines VA allocated to Edwards the full amount of the section

179D deduction with respect to the EECBP installed in Building 200.

Edwards claimed a section 179D deduction of $1,073,237 for the 2013

taxable year, which is equal to the product of $1.80 and 596,243, the

square footage of Building 200. There is no indication in the record that

any section 179D deductions have been taken with respect to Building

200 for any prior taxable years.

Respondent contends that Edwards overstated the amount of the

section 179D deduction because the cost of property does not exceed

$304,640, the total amount Edwards billed to Hines VA for Building 200.

Respondent further argues that the total amount invoiced also included

costs Edwards incurred in 2014, which would necessarily be excluded

from the cost of property placed in service in 2013. Thus, respondent

asserts that the amount of the section 179D deduction allowed must be

less than $304,640.

Petitioners, on the other hand, contend that the cost of property

in these cases does not limit the amount of deduction because it far

exceeds the section 179D deduction Edwards claimed. Citing section

179D(d)(4), petitioners argue that, upon allocation of the section 179D

deduction, Edwards stands in the shoes of Hines VA for purposes of

determining the cost of property. See § 179D(d)(4) (“Such person shall

be treated as the taxpayer for purposes of this section.”). Thus,

petitioners argue that the cost of property consists of the total

expenditures Hines VA made with respect to property installed in

Building 200, which includes not only the amounts paid to Edwards but

also the amounts previously paid to other contractors for the HVAC

upgrade work from 2010 through 2012. Petitioners assert that, because

Hines VA’s contract with the contractor hired for the original HVAC

upgrade work was for $4,975,000 alone, the cost of property far exceeds

the section 179D deduction Edwards claimed for the 2013 taxable year.

We need not decide what the term “cost” means generally for

purposes of section 179D. Whatever the meaning of that term more

broadly, under section 179D(a), the amount of the deduction allowed for

a given taxable year is equal to the “cost of [EECBP] placed in service

during the taxable year.” Petitioners do not allege, and the record does

not indicate, that any of the property installed in Building 200 as part

of the original HVAC upgrade work was placed in service during the

2013 taxable year. In fact, the contract progress report petitioners

submitted as evidence of the cost of the original HVAC upgrade states

that the work on that project was 98% complete as of June 2011.

Moreover, Mr. Paul represented in his testimony at trial that, at the

time Edwards began performing services under the maintenance

contract in 2012, the existing HVAC system was in place and

operational. Thus, the property installed in Building 200 as part of the

original HVAC upgrade does not constitute EECBP “placed in service”

during the 2013 taxable year.

However, as we concluded above, the EECBP that Edwards

installed in Building 200 with respect to the projects at issue in these

cases was placed in service during the 2013 taxable year. Thus, the cost

of that property is included in determining the cost of property under

section 179D(a). Hines VA paid Edwards a total of $304,640 for the

EECBP installed in Building 200 in 2013. Accordingly, we conclude that

the cost of the EECBP placed in service during the 2013 taxable year in

Building 200 is $304,640.

Since the cost of the EECBP to Hines VA does not exceed the

maximum amount of deduction determined under section 179D(b), the

amount of the section 179D deduction allowed is limited to the cost of

the EECBP. See Notice 2008-40, § 3.06. Pursuant to section 179D(d)(4),

Hines VA allocated to Edwards “the full federal income tax deduction

available under section 179D” for the EECBP installed in Building 200

in 2013. Accordingly, we conclude that the amount of the section 179D

deduction Edwards is entitled to for the 2013 taxable year is $304,640.

VIII. Conclusion

On the basis of the foregoing, we conclude that Edwards is

entitled to a section 179D deduction of $304,640 for the 2013 taxable

year. In reaching our holdings, we have considered all arguments made

by the parties and, to the extent not discussed above, we consider those

arguments to be irrelevant, moot, or without merit.

To reflect the foregoing,

Decisions will be entered under Rule 155.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.