Olsen v. CIR

52 F.4th 889

• Court: Court of Appeals for the Tenth Circuit
• Decided: November 4, 2022
• Docket: 21-9005
• Status: Published

Opinion

Appellate Case: 21-9005 Document: 010110763506 Date Filed: 11/04/2022 Page: 1 FILED United States Court of PUBLISH Appeals Tenth Circuit UNITED STATES COURT OF APPEALS November 4, 2022 FOR THE TENTH CIRCUIT Christopher M. Wolpert _________________________________ Clerk of Court

PRESTON OLSEN; ELIZABETH OLSEN,

Petitioners - Appellants,

v. No. 21-9005

COMMISSIONER OF INTERNAL REVENUE,

Respondent - Appellee. _________________________________

Appeal from the United States Tax Court (CIR No. 26469-14 & No. 21247-16) _________________________________

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. _________________________________

BACHARACH, Circuit Judge. _________________________________

This appeal addresses the denial of tax benefits relating to Mr.

Preston Olsen’s purchases of solar lenses. These benefits are available only Appellate Case: 21-9005 Document: 010110763506 Date Filed: 11/04/2022 Page: 2

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.

I. Mr. Olsen enters into a lens-sale-and-leaseback transaction with Mr. Neldon Johnson’s enterprise.

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).

1 Mr. Olsen and his spouse filed joint tax returns, so both Mr. and Mrs. Olsen petitioned the tax court and appealed the tax court’s ruling. But the parties agree that Mr. Olsen had acted alone in buying the lenses, so we discuss his motive rather than Mrs. Olsen’s.

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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.

2 The tax court said that the obligation to pay more would be triggered by the generation of electricity, not revenue. But the trigger for other payments involved the production of revenue rather than electricity.

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II. The Olsens claim depreciation deductions and solar energy credits.

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.

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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.

III. The IRS and the tax court disallow the tax benefits, and we apply dual standards over the legal conclusions and factual findings.

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).

IV. The Olsens had no right to deductions for depreciation based on the absence of a profit motive.

For the depreciation deductions, the Olsens bore the burden of proof.

INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992). To satisfy this burden,

the Olsens needed to show that Mr. Olsen had bought the solar lenses to

3 From 2009 through 2013, the Olsens paid no federal income taxes. In 2014, the Olsens paid $1,538 in federal income taxes on $183,344 of wages—an effective tax rate of 0.8%.

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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) (using

property in a trade or business); Cannon v. Comm’r, 949 F.2d 345, 348 &

n.2 (10th Cir. 1991) (holding property for the production of income); see

also I.R.C. § 183(a) (requiring that a taxpayer engage in an activity for

profit to justify a deduction for that activity). 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

4 The tax court also found that Mr. Olsen had not placed the solar lenses in service or operated the business with regularity or continuity. We need not address these findings because the Olsens would not be entitled to the tax benefits even if Mr. Olsen had placed the lenses in service and operated the business with regularity and continuity.

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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

(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 (“[A] taxpayer’s statement of intent is given

less weight than objective factors in determining such intent.”).

We have used two sets of factors to assess the taxpayer’s intent:

1. the nine nonexclusive factors listed in Treasury Regulation § 1.183–2(b), Cannon, 949 F.2d at 350, and

2. five signs that the taxpayer lacks a profit motive, Nickeson, 962 F.2d at 977.

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.

1. Nine Factors in the Treasury Regulation

In reviewing this finding, we consider the Treasury Regulation’s nine

non-exclusive factors.

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1. The “[m]anner in which the taxpayer carries on the activity.”

Treas. Reg. 1.183-2(b)(1). The tax court found that Mr. Olsen had not

conducted the activity in a business-like manner, observing that

 the entity owning the lenses had lacked substantial business records, a separate bank account, a business plan, or a marketing strategy, and

 the lessee (LTB) hadn’t signed any of the lease agreements or made any lease payments.

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

(Jan. 10, 2012 email from Mr. Olsen to his sister); see p. 11, 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

(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

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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)

(applying this factor against the taxpayers, despite their consultation of

experts in the industry’s scientific and technical aspects, based on the

failure to “seek expert advice regarding the economic or business

aspects”).

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 clearly err by weighing this factor against the Olsens.

See United States v. Apperson, 441 F.3d 1162, 1195 (10th Cir. 2006)

(noting that an appellant had not explained how the district court had erred

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and had thus “failed to sufficiently place [the] rulings at issue”); see also

pp. 11–12, below.

3. “The time and effort expended by the taxpayer in carrying on

the activity.” Treas. Reg. § 1.183-2(b)(3). The tax court found that Mr.

Olsen hadn’t spent much time on the business based on

 an observation that Mr. Olsen had visited the site only “once or twice” over five years and

 his concession “that his [business] activities [had been] limited to” writing annual checks to buy lenses, renewing the limited liability company each year, maintaining copies of the agreements, and deciding annually how many lenses to buy.

Appellants’ App’x vol. 9, at 2204. With this observation and concession,

the tax court pointed out that the promoters had assured Mr. Olsen of his

freedom “to work as little . . . as he would like in his solar business.” Id.

at 2197.

Despite that assurance, the Olsens insist that Mr. Olsen spent

“substantial” time on his lens business. But the Olsens don’t discuss the

tax court’s reasoning or conclusion. With no such discussion, we see no

clear error in the district court’s finding as to Mr. Olsen’s time and effort.

See United States v. Apperson, 441 F.3d 1162, 1195 (10th Cir. 2006)

(noting that an appellant didn’t adequately challenge the rulings, relying

on a failure to explain how the district court had erred); see also pp. 9–10,

above.

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4. The “[e]xpectation that assets used in [the] activity may

appreciate in value.” Treas. Reg. § 1.183-2(b)(4). The tax court found that

Mr. Olsen hadn’t expected the lenses to appreciate in value because they

“were essentially worthless” except for a “very unlikely” chance that the

project would produce electricity at a commercial rate. Appellants’ App’x

vol. 9, at 2204. The Olsens disagree, arguing that the tax court should have

credited Mr. Olsen’s asserted belief in the technology based on expert

testimony that the lenses could generate electricity.

The tax court declined to credit Mr. Olsen’s asserted belief in the

lens technology, and we afford “even greater deference to the trial court’s

[credibility] findings” than to other factual findings because the trial court

had the opportunity to observe the witnesses’ testimony. Anderson v.

Bessemer City, 470 U.S. 564, 575 (1985).

The tax court explained its credibility determinations, noting that Mr.

Olsen’s testimony was “self-serving” and undermined by his statement that

the equipment “‘look[ed] a little like junk.’” Appellants’ App’x vol. 9,

at 2203–04 (quoting Appellants’ App’x vol. 3, at 751 (Jan. 10, 2012 email

from Mr. Olsen to his sister)); see p. 8, above. The Olsens don’t say why

this credibility finding was wrong, so we defer to the tax court’s

assessment of Mr. Olsen’s expression of confidence in the system. See

United States v. Apperson, 441 F.3d 1162, 1195 (10th Cir. 2006) (noting

that an appellant had not explained how the district court had erred and had

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thus “failed to sufficiently place [the] rulings at issue”); see also p. 10,

The Olsens argue that expert testimony shows the reasonableness of

Mr. Olsen’s alleged optimism about the technology. But this argument

ignores much of the expert testimony.

The Olsens’ expert witness testified that he had seen a test system

and thought that it was “technically viable to generate electricity.”

Appellants’ App’x vol. 7, at 1809. But this witness conceded that the

system “wasn’t connected to anything” and “wasn’t putting anything on the

[electric] grid.” Id. at 1808–10.

The government’s expert witness went further, testifying that the

system

 couldn’t generate electricity,

 might be able to generate electricity in five years, but only if Mr. Johnson were to change course by increasing his investment and hiring new experts, and

 would never be commercially viable.

The Olsens disregard much of the expert testimony, focusing only on

the conclusion that the system might be able to generate electricity in five

years. But the tax court could reasonably consider the rest of the expert

testimony to find that Mr. Olsen hadn’t expected the lenses to appreciate in

value.

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Finally, the Olsens rely on Mr. Olsen’s testimony that he had bought

roughly a million shares in International Automated Systems, Inc., the

entity that had sold the solar lenses. The tax court didn’t discuss this

testimony, but it wouldn’t have compelled a contrary finding. The tax court

didn’t question the profitability of International Automated Systems.

According to the tax court, this entity obtained its profitability by selling

lenses for prices “vastly” above the manufacturing costs. Appellants’

App’x vol. 9, at 2178.

Mr. Olsen was one of those purchasers paying “vastly” above the

manufacturing costs. So even if Mr. Olsen had expected the stock price of

International Automated Systems to rise, why would he have expected a

profit from the lenses that he had bought? He was locked into an

arrangement to (1) buy the lenses for prices vastly above the

manufacturing costs and (2) lease them for free unless the system were to

produce revenue. See p. 3, above. And even if the system were to produce

revenue, Mr. Olsen’s company would recoup only $150 per year for each

lens. See id. Mr. Olsen could thus expect International Automated Systems’

share price to rise, but only at the expense of companies (like his) that had

bought the lenses at inflated prices.

* * *

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The record supports the tax court’s finding that Mr. Olsen had not

expected the lenses to appreciate in value. So the tax court did not clearly

err in applying this factor.

5, 6, and 7. The taxpayer’s profits and losses. Treas. Reg. § 1.183-

2(b)(5) to (7). Factors 5, 6, and 7 concern whether the taxpayer had a

reasonable hope of making a profit. Factor 5 addresses the taxpayer’s

“success . . . in carrying on other . . . activities,” Factor 6 addresses the

“taxpayer’s history of income or losses with respect to the activity,” and

Factor 7 addresses “[t]he amount of occasional profits, if any, which are

earned.” Id. If the taxpayer has sustained losses beyond an initial startup

period or realized only “[a]n occasional small profit from an activity

generating large losses,” the taxpayer is less likely to have a profit motive.

Treas. Reg. § 1.183-2(b)(6) to (7). In contrast, taxpayers more likely have

a profit motive when they’ve had sustained periods of net income or

substantial occasional profits. Id. When taxpayers experience losses, the

tax court can still find a profit motive based on a record of creating profits

from unprofitable enterprises. Treas. Reg. § 1.183-2(b)(5).

The tax court found that these factors weighed against the Olsens.

The lenses never generated any revenue for Mr. Olsen, and Mr. Johnson

never produced a commercially usable volume of electricity. Despite the

lack of revenue or production, Mr. Olsen continued to purchase more

lenses. After Mr. Olsen made the down-payments for these purchases, the

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promoters breached their promises by failing to place the lenses in service.

Despite these breaches, Mr. Olsen didn’t seek a refund. He instead

continued to buy more lenses.

The Olsens argue that Mr. Olsen continued to buy lenses because he

believed in the future success of the technology. But the tax court

discounted Mr. Olsen’s credibility, and the Olsens have not challenged the

tax court’s assessment of credibility. See p. 10, above. So the tax court

could reasonably find that these factors had weighed against the Olsens.

See Cannon v. Comm’r, 949 F.2d 345, 352 (10th Cir. 1991) (concluding

that an eleven-year period of substantial losses constituted “persuasive

evidence” that the taxpayer had no profit motive).

8. The taxpayer’s financial status, including other sources of income.

Treas. Reg. § 1.183-2(b)(8). This factor may weigh against a profit motive

if the taxpayer has obtained “[s]ubstantial income from sources other than

the activity (particularly if the losses from the activity generate substantial

tax benefits).” Id. In applying this factor, the tax court found that this

factor had weighed against the Olsens because Mr. Olsen (1) had

“substantial wage income” and (2) used the losses from the lenses to nearly

eliminate his tax liability. 5 Appellants’ App’x vol. 9, at 2205.

5 In 2014, the Olsens apparently miscalculated and had to pay federal taxes of $1,538. The Olsens paid no federal taxes in any of the other years at issue. See p. 5 n.3, above.

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The Olsens argue that this factor is neutral because any tax benefits

from business losses would have been offset by the losses themselves. See

Engdahl v. Comm’r, 72 T.C. 659, 670 (1979) (“As long as tax rates are less

than 100 percent, there is no ‘benefit’ in losing money.”). For example, if a

taxpayer loses $1,000 and has a top marginal tax rate of 25%, the $1,000

deduction would yield tax savings of $250. But the taxpayer would still

lose $1,000 in the business, creating a net loss of $750.

But this reasoning would apply only if the taxpayer had actually lost

$1,000. The Olsens claimed losses based on the full purchase price of the

lenses even though Mr. Olsen (1) had paid only 30% of the price at the

time of purchase and (2) wouldn’t owe the remaining 70% until after the

system had started generating revenue. See p. 3, above. So the Olsens

ultimately claimed more in tax deductions than they had paid for the

lenses.

The Olsens counter that they might eventually need to pay the rest of

the purchase prices. But the government’s expert witness opined that the

system would never generate a commercial volume of power. Without a

commercial volume of power, the system would never generate any revenue

and Mr. Olsen would never owe more for the lenses. So the tax court did

not clearly err by treating the Olsens’ losses as largely “artificial.”

Appellants’ App’x vol. 9, at 2206.

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9. The presence of personal motives. Treas. Reg. § 1.183-2(b)(9).

The final factor provides that taxpayers may lack a profit motive when they

have personal or recreational motives for conducting the activity. Id. The

tax court did not discuss any personal or recreational motives. But the

Olsens invoke this factor, denying any purpose involving pleasure or

recreation.

No one suggests a personal or recreational motive. To the contrary,

the tax court found a motive to avoid taxes. That finding wasn’t

undermined by the absence of a personal or recreational purpose. See

Westbrook v. Comm’r, 68 F.3d 868, 878 (5th Cir. 1995) (concluding that

the lack of a personal or recreational purpose had been “outweighed by

other facts establishing the lack of a profit motive”).

The tax court didn’t clearly err in applying the nine regulatory

factors.

2. Five Signs of a Motivation Driven by Tax Benefits

We’ve identified five common characteristics of activities suggesting

the absence of a profit motive: (1) the marketing materials focus on

expected tax benefits, (2) the taxpayer buys the item for a grossly inflated

price without negotiating, (3) the taxpayer doesn’t ask the seller about

potential profitability, (4) the taxpayer lacks control over activities, and

(5) the taxpayer uses nonrecourse debt. Nickeson v. Comm’r, 962 F.2d 973,

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977 (10th Cir. 1992). The district court could reasonably rely here on three

of these circumstances:

1. The marketing materials focused on projected tax benefits.

2. Mr. Olsen paid a grossly inflated purchase price for the lenses without negotiating.

3. Mr. Olsen lacked control over the business.

First, the marketing for the lenses focused on projected tax benefits.

See Appellants’ App’x vol. 9, at 2206. For example, the promotional

materials said:

 “Your objective in purchasing your [solar-energy lens] systems is to zero out your taxes.”

 “Buy our solar units with your tax money instead of giving it away to the IRS.”

Id. at 2178, 2180. And an early email pitched Mr. Olsen on the tax benefits

while saying little about the possibility of a profit:

Liz said you may be interested in our new solar tax credit program. I would like to set up a time where we could talk about it in more detail but I will give you the basics of the program now.

1. Decide how much you owe in taxes (personally or business)

2. Buy our solar units with your tax money rather than give it away to the IRS.

3. Give the IRS forms #3468, #3800, #4562 and Schedule C instead of money.

4. Receive nearly double your investment from the IRS in tax benefits.

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5. Get income off of your equipment for $35 [sic] years.

Also, for each unit bought, our company will give $30,000 to a not-for-profit organization of your choice in your name if you would like to set this up too.

Appellants’ App’x vol. 3, at 703. This marketing weighed against a profit

motive. See Nickeson, 962 F.2d at 977 (stating that “marketing on the basis

of projected tax benefits” is a “common component[]” of transactions

lacking a profit motive).

Second, Mr. Olsen paid a grossly inflated purchase price without

negotiating. Mr. Olsen conceded that he’d not negotiated the purchase

price, and the record contains no evidence about the market value of the

lenses. The promoters told Mr. Olsen the purchase price for each lens:

$30,000 in 2009 and $3,500 from 2011 to 2014. After paying for the

lenses, Mr. Olsen had to lease them to a Johnson entity. That lease would

be free unless the system produced revenue. See p. 3, above. And if the

system were to produce revenue, the Johnson entity would pay Mr. Olsen’s

company only $150 per year. See id. At that rate, it’d take over 23 years

for Mr. Olsen to break even. And there was no evidence suggesting that the

lenses would even last that long.

Despite the one-sided nature of the transaction, Mr. Olsen did not

even try to negotiate the purchase price. The willingness to forgo any

negotiation suggests the lack of a profit motive. See Nickeson, 962 F.2d

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at 977 (stating that “grossly inflated purchase price[s] set without

bargaining” are common components of transactions lacking profit

motives).

Third, Mr. Olsen lacked control over the activities. In fact, after

buying lenses for two years, Mr. Olsen admitted that he did not fully

understand the project, explaining “that people ask[ed] [him] what it [was]

specifically that they [would] be purchasing and [he didn’t] know.”

Appellants’ App’x vol. 9, at 2186. Given his lack of understanding, he

apparently lacked any control over the operations.

Mr. Olsen not only lacked an understanding, but never took

possession of the lenses that he had bought and couldn’t identify which

ones were his. Given his inability to identify his own lenses, the tax court

could reasonably find a lack of control over the business, which would

weigh against a profit motive. See Nickeson, 962 F.2d at 977 (stating that a

“taxpayer[’s] lack of control over activities” is a common component of

transactions lacking a profit motive). 6

6 We’ve said that nonrecourse liability could signal the lack of a profit motive. See pp. 17–18, above. The Olsens point out that Mr. Olsen incurred personal liability for his future payments. But those payments would become due only after the system had started generating revenue. See p. 3, above. And the tax court found it “very unlikely” that the system could ever create enough electricity to earn any revenue. Appellants’ App’x vol. 9, at 2204. So even though Mr. Olsen could incur personal liability, the remoteness of that possibility could reasonably weigh against a profit motive.

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The Olsens haven’t shown clear error in rejecting a profit motive

based on the marketing materials, payment of a grossly inflated purchase

price without negotiation, and lack of control. At most, the Olsens have

shown that the tax court could have weighed the evidence differently. But

more is necessary to show clear error. Anderson v. Bessemer City, 470 U.S.

564, 574 (1985).

3. Motivation for Tax Benefits Rather than a Profit

The Olsens argue that a profit motive can exist when a taxpayer

intends to make a profit after taxes even if the tax benefits were essential

to profitability. The government takes a different approach, distinguishing

between motives to profit and save in taxes. See Simon v. Comm’r, 830

F.2d 499, 500 (3d Cir. 1987) (“‘[P]rofit’ means economic profit,

independent of tax savings.”); Thomas v. Comm’r, 792 F.2d 1256, 1258

(4th Cir. 1986) (same); Holmes v. Comm’r, 184 F.3d 536, 543 (6th Cir.

1999) (same); Wolf v. Comm’r, 4 F.3d 709, 713 (9th Cir. 1993) (same). The

tax court could reasonably reject a profit motive under either approach by

doubting profitability even after the payment of taxes.

The Olsens rely on Sacks v. Commissioner, 69 F.3d 982 (9th Cir.

1995), where the Ninth Circuit held that a taxpayer’s investment wasn’t a

21 Appellate Case: 21-9005 Document: 010110763506 Date Filed: 11/04/2022 Page: 22

sham even though the activity had become profitable only because of a

solar energy credit. Id. at 991. 7 There the Ninth Circuit recognized that

 Congress sometimes used tax incentives to change investor behavior and

 when Congress did intend for tax incentives to change investor behavior, a profit motive might exist even if the tax benefit had been essential to profitability.

Id. at 991–92. But there the Ninth Circuit said that a profit motive cannot

arise solely from a desire for a tax benefit: the court must ask “whether the

taxpayer [had] intended to do anything other than acquire tax deductions.”

Id. at 987. So taxpayers might have a profit motive if they intend for a tax

credit to turn an activity that’s otherwise unprofitable into a profitable

venture. But it’s not enough if the taxpayer’s primary intent is to save in

taxes.

The Olsens have not shown an expectation for the solar leasing

business to become profitable even with the tax benefits. To the contrary,

the tax court found that Mr. Olsen had intended big tax losses to offset his

7 Courts addressing allegations of a sham transaction generally ask two questions: (1) whether the taxpayer’s “subjective business motivation” was to make a profit and (2) whether the transaction had “objective economic substance.” Jackson v. Comm’r, 966 F.2d 598, 601 (10th Cir. 1992). Because the first question (subjective business motivation) requires us to determine whether a profit motive existed, we can draw on cases considering whether the transaction was a sham. Nickeson v. Comm’r, 962 F.2d 973, 976 (10th Cir. 1992). So we can consider the Ninth Circuit’s opinion in Sacks v. Commissioner even though it involved consideration of a sham transaction.

22 Appellate Case: 21-9005 Document: 010110763506 Date Filed: 11/04/2022 Page: 23

wage income; and the Olsens have not shown clear error in this finding. So

the Ninth Circuit’s explanation doesn’t apply here.

To reverse on this ground, we would need to conclude that taxpayers

have a profit motive whenever their primary motives are to save in taxes.

But we’ve said that a taxpayer lacks a good-faith profit motive when a

transaction “was ‘the naked sale of tax benefits.’” Nickeson v. Comm’r,

962 F.2d 973, 977–78 (10th Cir. 1992) (quoting Brock v. Comm’r, 58

T.C.M. (CCH) 826, 836 (1989)). We thus can’t assume a profit motive

whenever the taxpayer’s primary motive is to save in taxes.

The tax court found that Mr. Olsen had bought the lenses with the

main purpose of saving in taxes rather than making a profit, and this

finding wasn’t clearly erroneous. So Mr. Olsen did not use the lenses in a

trade or business or hold them for the production of income. The tax court

thus correctly disallowed the depreciation deductions.

V. The Olsens could not obtain solar energy credits.

To obtain the solar energy credits, the Olsens needed to show a right

to deductions for depreciation or amortization. I.R.C. § 48(a)(3)(C). But

the Olsens could not claim the depreciation deductions because Mr. Olsen

had lacked a profit motive. See Part IV, above. And the Olsens don’t assert

eligibility for amortization. So the Olsens could not obtain the solar energy

credits.

23 Appellate Case: 21-9005 Document: 010110763506 Date Filed: 11/04/2022 Page: 24

In their reply brief, the Olsens argue that the credits would be

available if the lack of a profit motive had constituted the only reason to

deny the deductions for depreciation. For this argument, the Olsens assert

that I.R.C. § 183 limits a depreciation deduction to the taxpayer’s gross

income from the activity. The Olsens lacked any income from the lenses,

so this interpretation of § 183 would limit the depreciation deduction to

zero. But the Olsens argue that the solar energy credits would remain

available because the depreciation deductions were limited rather than

disallowed. The Olsens waived this argument by failing to make it in their

opening brief. Wheeler v. Comm’r, 521 F.3d 1289, 1291 (10th Cir. 2008).

VI. Conclusion

The tax court didn’t commit reversible error in denying the

depreciation deductions and the solar energy credits. So we affirm the tax

court’s decision.

24 Appellate Case: 21-9005 Document: 010110763506 Date Filed: 11/04/2022 Page: 25

Preston Olsen, et al. v. Commissioner of Internal Revenue, No. 21-9005 BACHARACH, J., concurring

I join with the majority opinion. But I write separately to add that

even with a profit motive, the Olsens wouldn’t have qualified for the

desired tax benefits. For the depreciation deductions, the Olsens needed to

show not only a profit motive but also placement of the lenses in service.

Treas. Reg. § 1.167(a)-10(b). Property is “placed in service” when it is

“placed in a condition or state of readiness and availability for a

specifically assigned function.” Treas. Reg. § 1.167(a)-11(e)(1)(i).

The Olsens argue that the lenses were placed in service as

components of a solar energy system or as property held out for lease. But

the tax court properly rejected both arguments.

1. The lenses were not placed in service as components of a solar energy system.

We haven’t decided when a component is placed in service. Is the

component placed in service when it’s ready to be used in the larger

system even if it’s not ready to operate? Or is the component placed in

service when the system as a whole is available for the component’s

specifically assigned function? The Olsens urge the first approach, but the

tax court adopted the second approach.

I would conduct de novo review of the tax court’s approach. See

Sealy Power, Ltd. v. Comm’r, 46 F.3d 382, 393 (5th Cir. 1995) (conducting

de novo review of the tax court’s definition of the legal standard for Appellate Case: 21-9005 Document: 010110763506 Date Filed: 11/04/2022 Page: 26

determining when an asset is placed in service); Armstrong World Indus.,

Inc. v. Comm’r, 974 F.2d 422, 431 (3d Cir. 1992) (conducting “plenary

review” of the tax court’s approach to determine when components of a

larger system had been placed in service).

The Fifth Circuit has considered when interdependent components

are “placed in service.” Sealy Power, Ltd., 46 F.3d at 390. When the

components are “designed to operate as a system,” the Fifth Circuit

considers a component “placed in service” only when “the entire system

reaches a condition of readiness and availability for its specifically

assigned function.” Id. The Third Circuit has adopted the same approach:

When a part is “essential to the operation of the project as a whole and

cannot be used separately to any effect,” the part is placed in service only

when the whole project enters service. Armstrong World Indus., Inc.,

974 F.2d at 434.

I would adopt this approach because a part is “read[y] and availab[le]

for a specifically assigned function” only if it can serve that function.

Treas. Reg. § 1.167(a)-11(e)(1)(i). If a part can serve its assigned function

only as a component of a larger system, the part would enter service only

when the rest of the system is ready and available for use.

The Olsens take a different approach, citing

 a tax court opinion holding that a component of a solar energy system constitutes solar energy property, Cooper v. Commissioner, 88 T.C. 84, 116–17 (1987), and 2 Appellate Case: 21-9005 Document: 010110763506 Date Filed: 11/04/2022 Page: 27

 opinions discussing whether equipment had been placed in service when it was ready to use, but not operated through no fault of the taxpayer.

These opinions shed little light here.

The first opinion, Cooper, does not address when components of an

energy-generating system are placed in service. In Cooper, the court did

discuss components of energy systems. But this discussion focused on

placement into service when a system had been held out for rent. 88 T.C.

at 113–14. So Cooper could bear on whether the lenses had been placed in

service in an equipment-leasing-business—but not in a power-generating

system. See Part 2, below.

The Olsens also point to opinions addressing placement into service

when external circumstances prevented use of the property. For example,

property may be unusable because of the weather. See Schrader v. Comm’r,

34 T.C.M. (CCH) 1572 (T.C. 1975) (air conditioner installed but not

needed due to weather), aff’d, 582 F.2d 1374 (6th Cir. 1978) (mem.); Sears

Oil Co. v. Comm’r, 359 F.2d 191, 198 (2d Cir. 1966) (barge delivered and

outfitted, but unable to be used until a frozen canal had thawed). Or

property may become useable only when other work is done. See SMC

Corp. v. United States, No. CIV-1-79-252, 1980 WL 1636 (E.D. Tenn.

Aug. 12, 1980) (unpublished) (shredder and crane could not be operated

until a utility had installed power lines), aff’d, 675 F.2d 113 (6th Cir.

1982) (per curiam). These opinions don’t bear on when a component of a

3 Appellate Case: 21-9005 Document: 010110763506 Date Filed: 11/04/2022 Page: 28

larger system is ready for its assigned use. So I would conclude that the tax

court applied the right legal standard.

Because the tax court used the right legal standard, I would review

its application of that standard for clear error. See Ampersand Chowchilla

Biomass, LLC v. United States, 26 F.4th 1306, 1312–14 (Fed. Cir. 2022)

(applying the clear-error standard to the Court of Federal Claims’

conclusions about power facilities’ specifically assigned functions and the

years that they’d been placed in service). The lenses would have entered

service only if the system itself had been ready and available for its

designated purpose of generating commercial electricity. The tax court

didn’t clearly err in finding a failure to prove that state of readiness and

availability.

The tax court applied five factors to determine whether the system

was ready and available to generate commercial electricity:

1. “[W]hether the necessary permits and licenses for operation have been obtained . . . .”

2. “[W]hether critical preoperational testing has been completed . . . .”

3. “[W]hether the taxpayer has control of the facility . . . .”

4. “[W]hether the unit has been synchronized with the transmission grid . . . .”

5. “[W]hether daily or regular operation has begun.”

4 Appellate Case: 21-9005 Document: 010110763506 Date Filed: 11/04/2022 Page: 29

Sealy Power, Ltd. v. Comm’r, 46 F.3d 382, 395 (5th Cir. 1995). The tax

court found that each factor weighed against a finding of placement into

service:

[The Johnson companies] had obtained no permits for operation of a solar energy plant. There is no evidence that they had completed “critical preoperational testing.” Quite the contrary: [the government’s expert] in reviewing Mr. Johnson’s material discovered “no tests, no test reports, [and] no documentation of any type” and found no evidence that the Delta site had “been recently used for any test activity.” The solar plant had not “been synchronized with the transmission grid”; “daily or regular operation” of the facility obviously had not begun; and no one had assumed “control” of a functional power plant. Indeed, [the government’s expert] credibly testified that the project, even if completed, would never be capable of generating electricity on a commercial scale. Appellants’ App’x vol. 9, at 2209.

The Olsens do not challenge the tax court’s application of these

factors, arguing instead that the plant had “reach[ed] a condition of

readiness and availability for its specifically assigned function—to

generate electricity.” Appellants’ Opening Br. at 26. But the Olsens have

not shown that the plant was ready and available to generate commercial

electricity.

The Olsens’ expert witness did not undermine the tax court’s finding.

The expert witness testified that even though he’d seen a tower generate

electricity, the system “wasn’t connected to anything.” Appellants’ App’x

vol. 7, at 1806–08. Given the lack of a connection, he acknowledged that

5 Appellate Case: 21-9005 Document: 010110763506 Date Filed: 11/04/2022 Page: 30

 production of energy for an electric grid would have required the Johnson enterprises to buy more equipment,

 only one tower had a full array of 70 lenses, and

 “thousands of lenses” had not been installed.

Id. at 1835. This expert testimony doesn’t suggest readiness or availability

of a system to generate commercial electricity.

And the government’s expert witness confirmed that the system

hadn’t been placed in service. He testified that

 the existing design would not allow generation of usable electricity and

 the system could generate usable electricity in five years only if Mr. Johnson were to replace his team with expert engineers.

Given the expert testimony, the tax court reasonably found that the

Olsens had not shown the system’s readiness to generate usable electricity.

So the tax court didn’t clearly err in finding that the Olsens’ lenses hadn’t

been ready and available for their designated purpose.

2. The lenses were not placed in service in an equipment-leasing business.

The Olsens argue in the alternative that they placed the lenses into

service in an equipment-leasing business. But the Olsens do not address the

tax court’s factual finding that the lenses had never been held out for lease.

For this finding, I would apply the clear-error standard. See

Ampersand Chowchilla Biomass, LLC v. United States, 26 F.4th 1306,

1312–14 (Fed. Cir. 2022) (applying the clear-error standard to the Court of 6 Appellate Case: 21-9005 Document: 010110763506 Date Filed: 11/04/2022 Page: 31

Federal Claims’ conclusion about facilities’ specifically assigned functions

and the year that they’d been placed in service); Armstrong World Indus.,

Inc. v. Comm’r, 974 F.2d 422, 429–30 (3d Cir. 1992) (applying the clear-

error standard to the tax court’s determination of when leased properties

had been placed in service).

Because the Olsens do not address the tax court’s reasoning, they

have not shown clear error. See United States v. Apperson, 441 F.3d 1162,

1195 (10th Cir. 2006) (noting that an appellant had not explained how the

district court had erred and had thus “failed to sufficiently place [the]

rulings at issue”). So even if the Olsens had shown a profit motive, they

wouldn’t have been entitled to the depreciation deductions. And without

eligibility for these deductions, the Olsens couldn’t have obtained the solar

energy credits. See Maj. Op., Part V.

Because the lenses weren’t placed in service, the Olsens couldn’t

have obtained the depreciation deductions or energy credits even if Mr.

Olsen had a profit motive.