# United States Tax Court

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URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Aff53a33b48a01f8d

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

United States Tax Court
160 T.C. No. 2
MICHAEL JOHNSON AND CYNTHIA JOHNSON, ET AL., 1
Petitioners
v.
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

2
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.

3
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

4
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.
I.

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.

5
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.

6
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.
A.

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

7
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.

8
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.
B.

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.

9
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.
C.

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.

10
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,

11
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.”
V.

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
I.

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’

12
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
A.

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).

13
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]
(C) which is installed as part of—
(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.

14
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).
B.

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.
10

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.

15
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.
C.

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).

16
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.
A.

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).

17
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).
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

18
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).
2.

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.

19
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.

20
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.

21
3.

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

22
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

23
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.
B.

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

24
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.
1.

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

25
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

26
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.
2.

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

27
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

28
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.
C.

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).

29
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

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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.
D.

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

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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

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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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Aff53a33b48a01f8d. Public record. Not legal advice.