Olsen v. Comm'r of Internal Revenue
| Docket Number | 21-9005 |
| Decision Date | 04 November 2022 |
| Citation | 52 F.4th 889 |
| Parties | Preston OLSEN; Elizabeth Olsen, Petitioners - Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Paul W. Jones, Hale & Wood, LLP, Salt Lake City, Utah, for Petitioners-Appellants.
Robert J. Branman, Attorney, U.S. Department of Justice, Tax Division (David A. Hubbert, Deputy Assistant Attorney General, and Joan I. Oppenheimer, Attorney, with him on the brief), Washington, D.C., for Respondent-Appellee.
Before HARTZ, BACHARACH, and EID, Circuit Judges.
This appeal addresses the denial of tax benefits relating to Mr. Preston Olsen's purchases of solar lenses. These benefits are available only if the taxpayer has a profit motive for the purchases. Applying this requirement, the tax court disallowed tax benefits in part because Mr. Olsen had lacked a profit motive.1 In our view, the tax court did not err in rejecting a profit motive, so we affirm.
Mr. Olsen bought the lenses in 2009, 2011, 2012, 2013, and 2014, through a program created by Mr. Neldon Johnson. Under the program, Mr. Johnson would use the lenses in a new system to generate electricity by heating a liquid to generate steam and drive a turbine.
Mr. Johnson never finished the system. He did build nineteen test towers by 2006. Nine years later, though, he had completed the lenses on only one tower and hadn't decided whether those lenses would heat water, oil, or molten salt.
Mr. Johnson funded the program through investors like Mr. Olsen. The investors bought lenses from Mr. Johnson's companies (at first International Automated Systems, Inc. and later RaPower3, LLC) and leased the lenses to another of Mr. Johnson's companies (LTB).
Under the leases, LTB promised to place the lenses in service and to operate them. Once the system began producing revenue, LTB would pay Mr. Olsen's company (PFO Solar, LLC) $150 per lens per year.
Based on this arrangement, Mr. Olsen's company made a down payment of 30% of the lens price. The rest of the price would be due in installments starting five years after the system started producing revenue.2 But the system never generated any revenue.
From 2009 to 2014, the Olsens annually claimed depreciation deductions and solar energy credits. The depreciation deduction recognizes that business property declines in value through wear and tear, obsolescence, or exhaustion. I.R.C. § 167(c)(1). To compensate for a decline in value, the taxpayer can deduct losses from the amount of taxable income. I.R.C. § 167(a). A solar energy credit also exists, allowing a credit equaling 30% of the basis for qualifying equipment that "uses solar energy to generate electricity." I.R.C. § 48(a)(3)(A).
From 2009 to 2014, the Olsens reported wages of $140,000 to $183,000. To offset these wages, the Olsens claimed depreciation deductions and solar energy credits based on the full price of the lenses, rather than the 30% that Mr. Olsen's company had paid. See Part I, above.
These claims allowed the Olsens to pay little or no federal income taxes.3 So the Olsens came out ahead even though they had never obtained any money from the leases.
The IRS issued notices of deficiency, disallowing the deductions and solar energy credits that the Olsens had claimed from 2010 to 2014. The Olsens challenged the deficiency notices. For this challenge, the Olsens needed to show a right to the deductions and credits. T.C. R. 142(a). The tax court found the showing insufficient, and the Olsens appeal.
In deciding this appeal, we apply the same standards governing review of a civil bench trial. I.R.C. § 7482(a)(1). For the tax court's legal conclusions, we conduct de novo review; for the factual findings, we apply the clear-error standard. Petersen v. Comm'r , 924 F.3d 1111, 1114 (10th Cir. 2019).
For the depreciation deductions, the Olsens bore the burden of proof. INDOPCO, Inc. v. Comm'r , 503 U.S. 79, 84, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992). To satisfy this burden, the Olsens needed to show that Mr. Olsen had bought the solar lenses to make a profit. See I.R.C. §§ 167(a), 183. The tax court did not clearly err in rejecting the existence of a profit motive, so we affirm the tax court's disallowance of depreciation deductions.4
The need for a profit motive comes from the text of the tax code. Under the code, a taxpayer may claim a depreciation deduction only if the property is "used in the trade or business" or "held for the production of income." I.R.C. § 167(a)(1), (2). Property is used in a trade or business or held for the production of income only if the taxpayer has a profit motive. See Wiles v. United States , 312 F.2d 574, 576 (10th Cir. 1962) (); Cannon v. Comm'r , 949 F.2d 345, 348 & n.2 (10th Cir. 1991) (); see also I.R.C. § 183(a) (). An incidental profit motive is not enough; the Olsens needed to show that "profit [had been] the dominant or primary objective of the venture." Cannon , 949 F.2d at 350.
Applying this standard, the tax court found that the Olsens had not shown a profit motive. This finding was factual, so we apply the clear-error standard. Id. at 349. This standard is deferential: Even if we would have arrived at a different finding, we must affirm if the tax court's "account of the evidence is plausible in light of the record viewed in its entirety." Id. (quoting Anderson v. Bessemer City , 470 U.S. 564, 573–74, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) ). The Olsens have not shown clear error.
The tax court must gauge a taxpayer's intent based on "the unique circumstances of a case." Nickeson v. Comm'r , 962 F.2d 973, 977 (10th Cir. 1992). Although the taxpayer's intent involves a subjective question, the tax court should give "greater weight ... to objective facts than to the taxpayer's mere statement of his intent." Treas. Reg. § 1.183-2(a) ; accord Cannon , 949 F.2d at 351 n.8 ().
We have used two sets of factors to assess the taxpayer's intent:
But "each case is unique," and neither set of factors is exclusive; so the tax court must consider "all of the unique circumstances of a case." Id.
In considering these circumstances, the tax court probed the relevant factors and found no profit motive.
In reviewing this finding, we consider the Treasury Regulation's nine non-exclusive factors.
We can consider not only these observations, but also the purchase agreements in 2012, 2013, and 2014. All of these agreements contained deadlines that had already passed at the time of signing. And Mr. Olsen kept buying lenses for three years after commenting that the seller's "stuff always look[ed] a little like junk." Appellants’ App'x vol. 3, at 751 (); see p. 899, below.
Despite this evidence, the Olsens point to Mr. Olsen's efforts to manage the business (such as registering his limited liability company, using that entity to buy the lenses, and tracking his agreements). But the Olsens can't base clear error on their disagreement with the tax court's weighing of evidence. Anderson v. Bessemer City , 470 U.S. 564, 573–74, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985). We thus conclude that the tax court didn't clearly err by weighing this factor against the Olsens.
2. "The expertise of the taxpayer or his advisors." Treas. Reg. § 1.183-2(b)(2). The tax court found that this factor weighed against a profit motive because Mr. Olsen (1) had lacked expertise in solar energy or equipment leasing and (2) hadn't consulted experts in solar energy or equipment leasing.
The Olsens challenge this finding, arguing that Mr. Olsen (1) used the internet to research the science underlying the lenses and (2) consulted his sister, who was a chemistry professor. But this regulatory factor calls for extensive study or consultation of experts in the field. Treas. Reg. § 1.183-2(b)(2). The tax court didn't clearly err by requiring more of Mr. Olsen than basic internet research and consultation with a chemistry professor. See Westbrook v. Comm'r , 68 F.3d 868, 878 (5th Cir. 1995) ().
The Olsens also point to Mr. Olsen's testimony that he had monitored the project through quarterly visits to the site. But the tax court discounted that testimony, noting that Mr. Olsen had "maintained no travel logs and documented no travel expenses," Appellants’ App'x vol. 9, at 2185; and the Olsens don't say how we can reject this credibility determination. So the tax court didn't...
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