The US v. Oehler Case: Why Choosing the Right Energy-Efficient Tax Incentive Provider Matters

Architects, engineers, and other designers may claim the 179D Deduction via allocation. However, trying to navigate the complexities of the claim without expert guidance may result in costly errors. A major object lesson took place last September, when a district tax court affirmed the disallowal of a lighting contractor’s deduction.

What can taxpayers learn from US v. Oehler?

The Background:

The 179D Tax Deduction is a federal incentive that rewards energy-efficient construction and design. It’s often claimed by the property owner/developer. However, if the property owner is a tax-exempt entity — such as a nonprofit organization or a government entity — they may allocate the deduction to the energy-efficient system’s designer. This “designer” may be an engineer, architect, or other professional.

The deduction may be allocated to a designer working on government buildings or properties owned by tax-exempt entities:

• K-12 Schools and Universities
• Non-Profits
• Hospitals
• Religious Institutions
• Military Bases
• Tribal-Owned Properties

There may be more than 1 qualifying design professional on a project.

Form 7205 is used to claim the 179D Tax Deduction. When the deduction is being allocated to a designer, the designer himself must complete the form’s final section, providing the building owner’s name, the allocation date, and the name and address of the owner’s representative authorized to complete the allocation.

The Code:

Notice 2008-40 provides:

“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 § 179D). A designer may include, for example, an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under §179D). A person that merely installs, repairs, or maintains the property is not a designer.”

The Case:

John Oehler and his wife Sharon are the owners of Broadway Electric, Inc. (BEI), an electrical contracting company. In 2013 they upgraded lighting fixtures in 28 Chicago public schools. They later claimed that this activity qualified for the 179D Deduction and subsequently amended their return, receiving a refund of over $450K.

The workflow was as follows:

• The Chicago School District hired architects to prepare plans for converting the existing T12 lighting fixtures to more energy-efficient T8 fixtures.
• The architect responsible for each school studied building plans and created new floorplans and lighting tables identifying the fixtures that needed attention.
• Engineering firms then provided BEI with detailed specifications for the work.
• BEI replaced and installed new fixtures, lamps, ballasts, and lenses, according to the plans the architects created.

The arguments were as follows:

• The government argued that BEI didn’t “design” anything – they only executed the architects’ designs. They didn’t create any technical specifications themselves.
• BEI claimed that while they may not have designed the original specifications, they created additional specifications by identifying additional fixtures that needed retrofitting or replacement. They were not able to supply any documentation to corroborate this claim, and in fact did not have the ability to modify specifications without authorization from the architects.

As stated in the Code, A person that merely installs, repairs, or maintains the property is not a designer. BEI was deemed to have merely installed the system in this case, and as such their work was not eligible for the 179D Deduction.

The Lessons:

1. Understanding who qualifies as a “designer” under § 179D is not as simple as taxpayers imagine. If Code definitions are misinterpreted, costly errors could result. 

2. Successfully claiming the 179D Deduction requires rigorous documentation of compliance with energy-efficiency standards. If said documentation cannot be provided, this may hinder the claims process.

Working with an experienced 179D Deduction professional can make the difference between a successful claim and one that is disallowed. Why take the risk?

If you’re an architect, engineer, contractor, or taxpayer interested in claiming the 179D Deduction, please reach out to Capstan team of subject matter experts. We know where the pitfalls are – and how to avoid them – and we deliver a thoroughly documented and fully defensible deduction, every time.