The Tax Court recently issued its Memorandum Opinion in Kelly M. Strieby and Jan E. Sharon-Strieby v. Commissioner of Internal Revenue, T.C. Memo. 2025-28, providing valuable insights into the complexities surrounding the claiming of investment tax credits under Section 48 of the Internal Revenue Code (the Code) and the limitations imposed by the passive activity credit rules of Section 469. This case, decided fully stipulated under Tax Court Rule 122, serves as a crucial reminder for tax practitioners of the necessity of thorough due diligence when advising clients on tax-advantaged investments, particularly those promising seemingly effortless tax benefits.

Facts of the Case

Kelly M. Strieby (Strieby) and Jan E. Sharon-Strieby (collectively, Petitioners) resided in Arizona and filed joint federal income tax returns for the 2015 and 2016 tax years. The crux of the dispute centered on investment credits claimed by the Petitioners under Sections 38 and 48 in connection with Strieby’s purported investments in Solar Farm, LLC (Solar Farm), an Arizona limited liability company treated as a partnership for federal income tax purposes.

For the 2015 tax year, Strieby signed a Membership Agreement and a Membership Funding Agreement (collectively, the 2016 Agreements) with Charles Kirkland (Kirkland), the manager of Solar Farm, on September 11, 2016, after the close of the 2015 tax year. These agreements indicated that Solar Farm would allocate at least $23,040 of investment tax credits to Strieby for 2015, with an anticipated refund of $34,818 and a subsequent contribution of $25,239 by Strieby to Solar Farm after receiving the refund. On their timely filed 2015 Form 1040, the Petitioners claimed an investment credit of $28,043, which equaled their total tax liability for the year and exceeded the amount stated in the 2016 Agreements. They received a refund of $34,818 and subsequently paid $25,239 to Solar Farm. Notably, Solar Farm did not file Form 1065, U.S. Return of Partnership Income, for the 2015 tax year.

Similarly, for the 2016 tax year, Strieby and Kirkland signed Membership Agreements in July 2017, again after the close of the tax year. These 2017 Agreements anticipated an allocation of at least $31,763 in investment tax credits to Strieby, a refund of $36,091, and a contribution of $28,587 back to Solar Farm after the refund. The Petitioners claimed an investment credit of $31,763 on their 2016 Form 1040, which also equaled their tax liability. They received a refund of $36,091 and paid $28,587 to Solar Farm. Solar Farm did file a Form 1065 for 2016, but the attached Schedule K-1 did not match the one on the Petitioners’ Form 1040, and the partnership did not include a depreciation schedule or claim any depreciation deductions, nor did it attach Form 3800, General Business Credit, or Form 3468, Investment Credit.

The Internal Revenue Service (IRS) determined federal income tax deficiencies and accuracy-related penalties under Section 6662(a) for both years. After some concessions by the Petitioners regarding unreported income, the remaining issues before the Tax Court were whether the Petitioners were entitled to the claimed Section 48 credits and whether they were liable for the accuracy-related penalties.

Taxpayers’ Request for Relief

The Petitioners argued that they were entitled to the Section 48 credits claimed for the 2015 and 2016 tax years. They contended that Section 469, concerning passive activity credits, did not apply to credits claimed under Section 48 because Section 48 is located in subpart E of part IV of subchapter A of the Code, while Section 469(d)(2) references credits allowable under subpart B or subpart D. Furthermore, they argued that they had sufficient bases in their interests in Solar Farm to permit the credits. Finally, they asserted that their position regarding the credits did not reflect negligence, thus the accuracy-related penalties should not apply. In support of their argument regarding Section 469, they cited Revenue Ruling 2010-16.

Court’s Analysis of the Law

The Tax Court systematically dismantled the Petitioners’ arguments, providing a detailed analysis of the relevant Code sections and established case law.

Applicability of Section 469 to Section 48 Credits: The court held that Section 469 does indeed apply to Section 48 energy credits. The court traced the statutory framework, noting that Section 38 allows a general business credit, which includes the investment credit determined under Section 46, and the amount of the investment credit includes the energy credit under Section 48. Although Section 48 defines the energy credit, it does not independently allow a credit; rather, the credit is allowable under Section 38, which is located in subpart D of part IV of subchapter A. Therefore, the Section 48 energy credit is a credit allowable under subpart D and is potentially a passive activity credit under Section 469(d)(2)(A)(i). The court cited its prior decisions in Olsen v. Commissioner, T.C. Memo. 2021-41, at *41, aff’d, 52 F.4th 889 (10th Cir. 2022), Lum v. Commissioner, T.C. Memo. 2012-103, 2012 WL 1193182, at *4, and Uyemura v. Commissioner, T.C. Memo. 2012-102, 2012 WL 1193190, at *4, to support this conclusion. The court dismissed the Petitioners’ argument regarding the 1984 redesignation of statutory provisions as irrelevant given the clear statutory text.
Section 469 Trade or Business Requirement: The court also rejected the Petitioners’ reliance on Revenue Ruling 2010-16. The court clarified that while the ruling discusses the trade or business requirement under Section 469 in the context of the Section 45D new markets credit, its reasoning is driven by the specific provisions of Section 45D, which concerns investments in qualified community development entities. The court distinguished the Section 48 credit, noting that the Petitioners’ investment in Solar Farm itself did not qualify for the credit; rather, it was Solar Farm’s purported activity of placing energy property in service that could potentially allow the credit. For property to qualify for the Section 48 credit, depreciation must be allowable, which requires the property to be used in a trade or business or held for the production of income under Sections 167(a) and 174(a) and (b). Since activities conducted through partnerships are considered the taxpayer’s activities under Treasury Regulation Section 1.469-4(a), if Solar Farm was engaged in the necessary activities, Strieby would also be treated as engaged in them. The court noted Kirkland’s plea agreement indicated the entities involved in the scheme held themselves out as being in the business of purchasing, installing, and leasing solar equipment. Thus, unless Strieby materially participated in this purported business, the Section 48 credits would be passive activity credits.
Material Participation: The court found that the Petitioners acknowledged their only involvement with Solar Farm was signing documents and making contribution payments, which does not constitute material participation under Section 469(h)(1) and Treasury Regulation Section 1.469-5T. Because the Petitioners had no income from passive activities, they had no regular tax liability allocable to passive activities. Consequently, the claimed Section 48 credits were passive activity credits disallowed under Section 469(a)(1).
Section 6662(a) Penalties: The court upheld the accuracy-related penalties under Section 6662(a) for negligence. Negligence is defined as any failure to make a reasonable attempt to comply with the Code, and it is strongly indicated if a taxpayer fails to reasonably ascertain the correctness of a credit that appears "too good to be true". The court found that a reasonable and prudent person should have recognized the arrangement with Solar Farm – acquiring membership interests well after the tax year closed for credits equal to their tax liability with a subsequent return of a significant portion of the refund – as suspicious. The lack of any indication that the Petitioners independently verified the propriety of their tax position strongly suggested negligence. The court also dismissed the Petitioners’ argument that their position on the applicability of Section 469 was reasonable, citing the clear statutory text and prior case law. The court further noted that Revenue Ruling 2010-16 was inapplicable to their specific facts. Because the Petitioners did not address the applicability of the penalty to the underpayments attributable to the conceded omitted income, the court deemed that issue abandoned. Therefore, the court held that the entirety of the Petitioners’ underpayments for the years at issue were attributable to negligence.
Reasonable Cause and Good Faith: The court concluded that the reasonable cause and good faith exception under Section 6664(c) did not apply. The Petitioners did not argue reliance on an information return or professional advice. In fact, for 2015, no Schedule K-1 was issued before filing, and for 2016, the return was filed before receipt of the Schedule K-1, leading to inconsistencies. Even if they had relied on an information return for the credit amount, it would not have supported their position on Section 469. The court found no basis to conclude that the Petitioners acted with reasonable cause and in good faith.

Application of Law to Facts

The court’s application of the law to the facts was straightforward. The timing of the agreements, the pre-determined credit amounts matching the tax liability, and the circular flow of funds raised significant red flags. The Petitioners’ lack of involvement in any actual solar farm business and their failure to adequately research the tax implications of this "investment" led the court to conclude that they were attempting to claim credits to which they were not entitled. The court emphasized that the arrangement appeared "too good to be true," and a reasonable taxpayer would have exercised greater diligence.

Court’s Conclusions

Based on its analysis, the Tax Court held that the Petitioners were not entitled to any credits determined under Section 48 with respect to Solar Farm for their 2015 and 2016 tax years. Furthermore, the court held that the Petitioners were liable for Section 6662(a) accuracy-related penalties with respect to the entirety of their underpayments for those years.

Implications for Tax Practitioners

Strieby v. Commissioner underscores several critical points for tax practitioners:

Due Diligence on Tax-Advantaged Investments: CPAs must exercise significant due diligence when advising clients on investments promising substantial tax credits. Scrutinizing the economic substance of the transaction, the timing of investment, and the level of client involvement is crucial.
Understanding the Interplay of Code Sections: A thorough understanding of how different Code sections interact, such as the relationship between Sections 38, 46, 48, and 469, is essential for accurate tax advice. Practitioners must look beyond the specific section under which a credit is claimed and consider potential limitations imposed by other provisions.
The "Too Good to Be True" Doctrine: Be wary of arrangements that promise effortless tax benefits. Treasury Regulation Section 1.6662-3(b)(1)(ii) explicitly states that negligence is strongly indicated when a taxpayer fails to reasonably ascertain the correctness of a credit that appears too good to be true.
Importance of Material Participation: For pass-through investments generating tax credits, understanding and assessing the client’s level of material participation (or lack thereof) is vital, especially in the context of passive activity limitations under Section 469.
Documentation and Verification: Encourage clients to maintain thorough documentation supporting their tax positions and to independently verify the legitimacy of tax-advantaged investments.
Consequences of Negligence: This case serves as a stark reminder of the potential for accuracy-related penalties when taxpayers fail to make reasonable attempts to comply with the tax laws.

In conclusion, Strieby v. Commissioner provides a cautionary tale about the allure of seemingly simple tax benefits and the critical role of CPAs in guiding clients through the complexities of the tax law. A thorough understanding of the relevant Code sections, diligent fact-finding, and a healthy dose of skepticism towards "too good to be true" scenarios are indispensable for protecting clients and upholding professional standards.

Prepared with assistance from NotebookLM.