Attorney-at-Law

“SITTIN’ IN THE MORNIN’ SUN”

In Uncategorized on 04/10/2012 at 18:44

Those words might have started a hit single for Otis Redding and Steve Cropper in 1968, but they don’t help Nelson Toshito Uyemura and Wendi Michiko Uyemura, 2012 T.C. Mem. 102, or Patrick T.W. Lum and Libby S. Lum, 2012 T.C. Mem. 103, or even Scott R. Wilson and Christine R. Yano, 2012 T.C. Mem. 101, all three filed 4/10/12, with Judge Cohen aboard for all three, as the facts are virtually identical.

All the taxpayers wanted solar hot water. None of them wanted to pay for the installation of the solar panels and concomitant electrical doodads. So they all went to Mercury Solar, yet another vendor of something-for-nothing. The deal was simple: buy one and get two free. Bring in another customer (known as a “ratepayer”), or let Mercury hook you up with one. Buy both installations on time. The ratepayer pays utility bills to a Mercury-provided entity, which entity pays State and local excise taxes, pays the debt service on both installations to Mercury, and remits any profit to the bringer-in.

The bringers-in claim they’re in the TOB of selling electrical power, take a Section 179 write-off for the installation and a Section 48 business activity energy credit. Mercury warns the bringers-in that they must (a) have some income tax liability and (b) “meaningfully participate” in the electric utility business.

Of course they don’t. Instead, in Otis’ immortal words, they’re just “sittin’ in the mornin’ sun, and they’ll be sittin’ there when evenin’ comes”, watching the deduction and credit roll in.

Except that, while they roll in, the bringers-in “watch  ’em roll away again”, as Section 469 passive loss rules wipe out deduction and credit.

Judge Cohen: “In general, a passive activity is a trade or business in which the taxpayer does not materially participate. Sec. 469(c)(1). A taxpayer materially participates in an activity when he or she is involved on a regular, continuous, and substantial basis. Sec. 469(h)(1). Participation generally means all work done in connection with an activity by an individual who owns an interest in the activity. Sec. 1.469-5(f), Income Tax Regs.” 2012 T.C. Mem. 102, at pp. 5-6.

So much for Nelson and Wendi. Also Patrick T. W. (Libby admits she did nothing). Patrick at least sold five other units for Mercury, but never looked at them.

Scott claims he did do something: “Petitioner visited his ratepayer’s residence at least monthly to inspect the solar equipment and consult with the ratepayer about the solar service. During these inspections, petitioner checked the solar roof panels and the inverter, which are components of the photovoltaic system. Petitioner tried to find other ratepayers, but was not successful. He did not refer any sales leads to Mercury Solar.” 2012 T. C. Mem. 101, at p. 5.

Judge Cohen does not let the sun shine in on Scott. “Petitioners have not proven or presented adequate evidence to shift the burden of proof that any of the material participation tests they rely upon are satisfied. Petitioner argues that, as the sole owner of the micro-utility activity, he performed all ‘tasks, functions and services of and for the business, including management’ with the exception of sending invoices to and collecting payments from his ratepayer. However, because individuals with … (Mercury’s recommended biller) collected payments, maintained records regarding the income, and made petitioner’s loan and State excise tax payments and individuals with Mercury Solar installed the equipment at his ratepayer’s home, petitioner’s participation did not constitute substantially all of the participation of any individual in the micro-utility activity.

“Petitioners also have failed to prove that petitioner participated in the micro-utility activity for more than 100 hours during each of the years in issue.” 2012 T.C. Mem. 101, at p. 7. (Footnote omitted.)

Even worse, Scott flunks the paper trail: “Petitioner maintained no business records such as appointment books, calendars, or logs. His testimony was based solely on his recollections and was completely lacking in detail with respect to dates and time spent performing specific tasks. While the regulations permit some flexibility regarding the records required to prove material participation, they do not allow this type of postevent ‘ballpark guesstimate’, and we are not bound to accept the unverified, undocumented testimony of taxpayers.” 2012 T. C. Mem. 101, at p. 8 (citations omitted.)

So the sun goes down on the bringers-in.

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