Rev. Rul. 85-40

1985-1 C.B. 1.

RESIDENTIAL ENERGY CREDIT; QUALIFYING SOLAR ENERGY PROPERTY

Published:  1985

Section 23--Residential Energy Credit, 26 CFR 1.44C-2:  Definitions.

  Residential energy credit;  qualifying solar energy property.  Two situations are used to show that certain components of a solar energy system, used for heating water in a taxpayer's principal residence, do not qualify as renewable energy source property if they serve a dual function.

ISSUE

  Whether the components of a system that uses solar energy to heat water for use in a taxpayer's principal residence qualify for the energy tax credit as renewable energy source property under the two situations described below.

FACTS

  Situation 1:

  A solar energy system is installed to provide hot water for use in the taxpayer's principal residence.  The system includes several flat solar collector plates mounted on the roof and a storage tank of appropriate capacity inside the dwelling.  Solar radiation heats an ethylene glycol solution in the copper pipe waterways of the collector plates.  The heated solution is pumped through a closed loop of pipe from the collectors through a heat exchanger and back to the collectors.  The heat exchanger transfers the heat in the solution to the water in the storage tank.

  Essential devices installed in connection with either the closed loop or the heated water storage tank are an expansion tank that maintains a set pressure in the collector loop solution, temperature/pressure relief values on both the loop and the storage tank, a valve that regulates flow of the glycol solution, a check-fill-drain valve in the loop, a temperature pressure indicator, and electrical equipment that controls the pump.

  The storage tank is available with, or without, an electrical heating element that supplies auxiliary heat when solar energy is inadequate to fully meet demand.  The heating element is an optional unit that is separate from the storage tank.  However, the storage tank has certain features built in to allow a heating element to be added easily.  For example, it contains a receptacle to which the heating element can be attached.  If a heating element is not desired, the storage tank is equipped with a metal plate to cover the receptacle.  Taxpayer A has purchased and installed the storage tank with the optional heating element.

  Situation 2:

  The facts are the same as in situation 1.  However, Taxpayer B has purchased and installed the storage tank without the optional heating element.

LAW AND ANALYSIS

  Section 23 of the Code (formerly section 44C, renumbered by the Tax Reform Act of 1984) provides that a credit against federal income tax shall be allowed with respect to expenditures for "renewable energy source property", property which, when installed in connection with a dwelling, transmits or uses solar energy for certain purposes that include providing hot water for use within such dwelling.  Section 1.44C-2(e)(1) of the Income Tax Regulations provides that renewable energy source property includes any "solar energy property" that meets certain conditions.  Among the examples of solar energy properties listed in section 1.44C-2(f) of the regulations are the materials and components of an "active solar system," a system based on the use of mechanically forced energy transfer or thermal energy transfer.  Where the purpose is to provide hot water the transfer is generally accomplished through the use of equipment such as collectors to absorb sunlight and create hot liquids, storage tanks to store hot liquids, pumps to circulate the liquids, thermostats to activate the pumps, and heat exchangers that use the hot liquids to heat water.

  Section 1.44C-2(f)(4) of the regulations provides that with respect to an active solar system only its materials and components whose sole purpose is to transmit or use solar radiation are included within the term "solar energy property".

  Because all parts of the system, from solar collector plates through the heat exchanger and storage tank, are required to use solar energy to provide hot water for use in the dwelling, all such parts are regarded as being solar energy property within the general meaning of section 1.44C-2(f) of the regulations;  however, this determination is without regard to section 1.44C- 2(f)(4) which excludes from such property any parts of the system that serve a dual purpose.  The only part of the system suspect in that regard is the hot water storage tank.

  In situation 1, the storage tank is equipped with the optional heating element, and therefore could serve as part of an active solar system and as a conventional hot water tank.  Because it could serve in this dual function, the "sole purpose" requirement of section 1.44C-2(f)(4) of the regulations is not met.

  In situation 2, the storage tank is not equipped with the optional heating element.  Its sole function is the use of solar radiation to provide hot water for the dwelling.

HOLDING

  Under situation 1, neither the optional heating element nor the storage tank qualifies as renewable energy source property because a dual function is served.  Under situation 2, all components of the system as described, including the storage tank, qualify as renewable energy source property.

Rev. Rul. 85-40, 1985-1 C.B. 1.