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Purchase Components which gave petitioner the following three
options at the end of the initial term of the SEP: (1) Extend
the term for an additional 61 months at a cost of $1 per month;
(2) purchase the solar water heating system at its current price;
or (3) have HEH remove the system. On a date not stated in the
record, petitioner extended the term for 61 months.
E. Petitioners’ 1996 Return
Petitioners claimed an energy credit of $536 (10 percent of
$5,355)1 on Form 3468, Investment Credit, attached to their 1996
Federal income tax return. Petitioners attached to their return
a Schedule K-1, Beneficiary’s Share of Income, Deductions,
Credits, etc., issued to petitioner by HEH. The Schedule K-1
indicates that HEH allocated $535 to petitioner as an energy
credit, but it does not indicate that HEH allocated any income to
petitioner for 1996.
F. The Notice of Deficiency
On March 21, 2000, respondent issued a notice of deficiency
to petitioners in which respondent determined that petitioners
were not entitled to an energy tax credit because: (a) The
energy leasing contract was in substance the purchase by
petitioner of solar equipment, and (b) petitioner received no
income as a beneficiary of the HEH trust in 1996 and thus was not
1 The exhibits show that HEH agreed to pay Mercury Solar
$5,325. The $30 difference between $5,355 and $5,325 is not
explained in the record.
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