The Tenth Circuit upheld a Tax Court decision that a taxpayer did not have a profit motive in his purchase and leases of solar lenses intended to generate electricity and sustained the IRS’s disallowance of deductions for depreciation under Sec. 167 and credits for solar energy under Sec. 48.

Facts: Preston Olsen, the taxpayer, entered a lens-sale-and-leaseback arrangement with Neldon Johnson. The lenses were to be used in a new system that would generate electricity by heating a liquid to generate steam and drive a turbine. Nine years after Olsen’s initial investment, of the 19 towers that had been planned to be built to hold the lenses, only one tower was completed with lenses installed.

Olsen initially bought the lenses from International Automated Systems (IAS) in 2009 and later from RaPower3 LLC (2011–2014), both owned by Johnson, making a down payment of 30% of the lens price with the remaining amount due in installments five years after the system began producing revenue. Through his own company, PFO Solar LLC, Olsen then leased the lenses to LTB, another company owned by Johnson, who would, Olsen was told, place the lenses in service and operate them. Once the system began producing revenue, PFO Solar would receive $150 in income per year from LTB for each of the lenses. However, during PFO Solar’s lease arrangement with LTB, the system never earned any income or produced any commercially viable amount of electricity.

Even though the lease arrangement did not earn income, Olsen, through PFO Solar, claimed depreciation deductions (Sec. 167(a)) and solar energy credits (Sec. 48(a)(3)) for tax years 2009 through 2014, which offset his ordinary wage income and led to almost no tax liability on his individual income tax returns for those years. The amounts claimed for these benefits were based on the full purchase price of the lenses and not the 30% down payment that was actually paid.

The IRS issued a notice of deficiency to Olsen disallowing the depreciation deductions and solar energy credits claimed for tax years 2010 through 2014. Olsen petitioned the Tax Court, which noted that Olsen’s was one of more than 200 cases involving Johnson’s investors, that Johnson’s operation had been investigated by the IRS as a tax shelter, and that the Department of Justice had obtained an injunction against it (Olsen, T.C. Memo. 2021-41). The court also noted that in his promotional materials to investors, Johnson suggested they could “zero out” their federal tax liability and that he referred Olsen and others to tax preparers who helped them do so.

The Tax Court held that Olsen was not entitled to the deductions and credits because he was not engaged in a trade or business or a rental activity with respect to the lenses. Neither was he able to claim a deduction for the production of income under Sec. 212, the Tax Court held, since he did not demonstrate a profit motive. In addition, the Tax Court held, Olsen’s losses were passive, against which he had no passive income to offset (Olsen, slip op. at 42).