Electrical Contracting Company Fails to Qualify for Sec. 179D Deduction

(Parker Tax Publishing October 2024)

A district court held that an electrical contracting company did not qualify as a designer of energy efficient commercial building property (EECBP) and thus was not entitled to Code Sec. 179D deductions for work it performed in upgrading lighting fixtures at various public schools. The court concluded that the company served merely as an installer of the EECBP and while it received the technical specifications for the architects of record, it was those architects that provided plans specifying what types of fixtures should be installed, where, and how each fixture should be wired, along with a schedule of light fixtures that would meet the plan's parameters. U.S. v. Oehler, 2024 PTC 240 (N.D. Ill. 2024).

Background

In 2013, John Oehler owned 100 percent of Broadway Electric, Inc. (BEI), a Chicago-based electrical contracting company. In March of 2014, BEI filed its 2013 tax return as an S corporation, using Form 1120-S. A month later, John and his wife, Sharon, filed their 2013 individual income tax return on Form 1040. In August 2016, BEI filed an amended 2013 Form 1120-S, on which it claimed energy efficient commercial building deductions under Code Sec. 179D for designing interior lighting systems that qualified as energy efficient commercial building property (EECBP). It claimed those deductions for the work it performed on upgrading lighting fixtures at 28 Chicago Public Schools (CPS) schools (the "CPS Lighting Projects"). As a result of the amended return, the Oehlers received a refund of $456,102.

Subsequently, the government claimed that BEI, and in turn the Oehlers, were not eligible for the Code Sec. 179D deduction and it filed suit to recover the refund it issued the Oehlers for 2013. The parties agreed to focus discovery on four test projects (Selected Projects): Henry Nash Elementary School (Nash), Northwest Middle School (Northwest), Emil G. Hirsch Metropolitan High School (Hirsch), and Bowen High School (Bowen). With respect to these projects, BEI claimed a $16,484 deduction for Nash, a $72,712 deduction for Northwest, a $151,685 deduction for Hirsch, and a $138,399 deduction for Bowen.

Code Sec. 179D, as in effect in 2013, defines EECBP as property (1) with respect to which depreciation (or amortization in lieu of depreciation) is allowable, (2) 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, (3) 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 (4) which is certified in accordance with Code Sec. 179D(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 Code Sec. 179D(d)(2).

In Notice 2008-40, the IRS provided the following guidance on who qualifies as a designer for purposes of the Code Sec. 179D deduction: A designer is a person that creates the technical specifications for installation of energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under Code Sec.179D). Where more than one designer exists, the government entity may determine which designer is primarily responsible and allocate the full deduction to that designer or alternatively allocate the deduction among several designers.

The CPS Lighting Projects involved converting existing T12 fluorescent lighting fixtures to T8 fluorescent fixtures. More specifically, it involved changing the ballasts in the fixtures from lower efficiency to higher-efficiency units. CPS hired architects to prepare plans and a scope of work for each Selected Project. The architect of record (AOR) for each Selected Project received historical building plans and record drawings for the schools from CPS, and then the AOR created floorplans and lighting tables or schedules identifying the lighting fixtures that required retrofitting or replacement (the original specifications). Various engineering firms provided BEI with the original specifications for the work to be done. The CPS project manager for the Selected Projects described BEI's job as "to pull and replace, according to the plans and scopes of work the architects had created." BEI's project manager for the Selected Projects described BEI's work generally as replacing and installing new light fixtures, lamps, ballasts, and lenses. BEI did not send invoices to CPS using the term "design," and its construction schedules did not include any element or phase identified as "design."

Before a district court, the government argued that BEI did not qualify as a designer of the Selected Projects and instead merely replaced and installed the lighting fixtures pursuant to technical specifications created by the AORs. The Oehlers, on the other hand, maintained that while BEI did not develop the original specifications, BEI created additional specifications by identifying additional fixtures that needed retrofitting or replacement.

Analysis

The district court agreed with the government and held that BEI did not qualify as a designer of the Selected Projects and was thus not entitled to a deduction under Code Sec. 179D. The court determined that BEI served merely as an installer of the EECBP and while BEI received the technical specifications for the Selected Projects from the AORs, it was the AORs that provided plans specifying what types of fixtures should be installed, where, and how each fixture should be wired, along with a schedule of light fixtures that would meet the plan's parameters. Although BEI in some instances identified additional fixtures that needed replacement or issues with the original specifications, the court concluded that BEI did not have the ability to modify the specifications itself but instead had to obtain authorization from the AORs and CPS to do so.

The court also found that, contrary to the Oehlers' argument, BEI did not create any additional specifications for the installation of energy efficient lighting at the Selected Projects. Instead, the court said, BEI's role was limited to implementing the technical specifications created by the AORs by reviewing the specifications, consulting with the AORs as to any additional fixtures that needed replacement or retrofitting, selecting the light fixtures that met the specifications, and then installing the light fixtures in accordance with the specifications.

For a discussion of the Code Sec. 179D energy-efficient commercial buildings deduction requirements, see Parker Tax ¶96,555.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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