With Taxation, It's About Timing

Published Date:
Jan 8, 2014

As a recent case shows, sometimes the state has to rule on tax issues that aren't really about tax at all. In Advisory Opinion TSB-A-13(8)I, the provisions of the law weren't in question; rather, the petitioner wanted to know what the state thought a plain English phrase meant. As a result, the state tax department had to step in and make a ruling because the state legislature had been vague.

The petitioner sells solar energy equipment, which may be eligible for a credit against personal
income taxes under state tax law § 606(g-1). To be eligible for this residential credit, homeowners must use the solar energy systems in their principal residence. They can claim the credit in the taxable year in which the solar system was placed in service.

And that's where the question lies. How do the homeowners define when the solar system is placed in service in a newly constructed home? Deputy Counsel Deborah R. Liebman found little help in the text of the law, noting that "placed in service" is nowhere defined in state tax law. Looking for guidance, Liebman turned to federal law, which is more detailed. She specifically cited federal regulations §§ 1.46-3, which discuss "placed in service" in the context of the investment tax credit, and federal regulations 167(a)-11(e)(1)(i) which discuss the term in the context of depreciation.

According to these federal guidelines, Liebman said, "placed in service" refers to the time in which the property is placed in a "condition or state of readiness and available for a specifically assigned function," as she wrote in the opinion. Applying this definition to the case at hand, Liebman said New York would consider that the solar energy system was considered "placed in service"—and thus eligible for the credit—when the installation was complete and the new home was ready for occupancy.

Liebman further noted that it was the taxpayer—and not the petitioner (the solar energy vendor)—who bore the burden of proving that the house was a primary residence. Considering New York's long and contentious history of rules and court cases focused on proving residency, a taxpayer with an apartment in Manhattan and a new solar-powered house in the Hamptons may have some explaining to do to the authorities before claiming the tax credit.

In fact, Liebman went further, and said that even if the taxpayer planned to eventually use the house as a principal residence at some future date, that wasn't good enough. The credit cannot be claimed, she said, until the taxpayer has actually started using the house as the principal residence.

It would seem that this opinion would have few implications for the vast majority of taxpayers, as such solar system are not yet very common. However, by defining "placed in service," the tax department's Office of Counsel gives strong hints on how it will look at this for any other tax credit where "placed in service" is an issue.

A final, more general lesson, revolves around the old physics saying that "nature abhors a vacuum." So, apparently, does the state tax department: If the state legislature hasn't addressed an issue, the Office of Counsel is happy to apply federal law.

For more on the importance of advisory opinions and how they work, see our interview with Deputy Counsel Deborah R. Liebman.

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