William L. Richter - Page 9




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          of his 1995 Form N-11, State of Hawaii Individual Income Tax                
          Return.                                                                     
          Notice of Deficiency and Related Matters                                    
               On October 6, 1998, respondent issued a notice of deficiency           
          disallowing the Federal energy credit claimed by petitioner on              
          his 1995 return.  The notice described respondent’s basis for the           
          determination as follows:                                                   
               It is determined that you are not entitled to the                      
               energy credits you have claimed.  It has been                          
               determined that you are not entitled to receive                        
               earnings from the trust.  Since you do not share in the                
               earnings of the trust, you are not allowed to receive                  
               passthrough credits.  Further, it is determined that                   
               the energy contracts were in substance, a sale of solar                
               equipment to you.  This determination would also                       
               prevent the passthrough of any energy credits.                         
               Petitioner filed his petition contesting respondent’s                  
          determination on December 14, 1998.  Over a year after petitioner           
          filed his petition in this case, HEH arranged for the preparation           
          of an amended Form 1041 for 1995, on which HEH claimed total net            
          income of $315,870 (including net profit from its Schedule C of             
          $361,983), an income distribution deduction of $316,526 for                 
          distributions allegedly made to HEH’s certificate holders, and a            
          tentative general business credit of $111,638 consisting of a               
          current year investment credit of $73,552 and a credit                      
          carryforward of $38,086.2  An amended Schedule K-1 was also                 

               2Mr. Sparkman testified that HEH amended its 1995 return               
                                                             (continued...)           






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