International Automated Systems (fka IAUS)

[scion]

76. In light of their knowledge about all of the facts above and the applicable tax law, Defendants know, or have reason to know:

a. under the proper circumstances, the Internal Revenue Code allows a taxpayer engaged in a trade or business certain tax deductions for expenses the taxpayer incurs while generating income. One such deduction is for depreciation, the “wear and tear” on property either acquired for use in the taxpayer’s “trade or business” or held by the taxpayer “for the production of income.” Other allowable deductions are “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on [the taxpayer’s] trade or business”;

b. participating in Defendants’ solar energy scheme does not create a legitimate “trade or business” for any customer, either one related to the lenses that customers purportedly purchase through the scheme or any other trade or business related to the scheme. To be allowed a deduction for depreciation or for ordinary and necessary business expenses, a taxpayer must have undertaken activity in a “trade or business” or “for the production of income” in good faith, with the primary purpose of the activity to make a profit. The taxpayer’s activity must have economic substance and not be entered into solely for the tax benefits. But Defendants promote and execute the solar energy scheme such that it lacks any requirement that customers engage in good faith, profit motivated activity in a “trade or business” or “for the production of income.” The scheme does not and will not produce income for customers (other than unwarranted tax benefits), either from the production of energy or through a legitimate business. Instead, the solar energy scheme lacks economic substance. Defendants induce customers to buy in to their solar energy scheme solely to obtain tax benefits (which wrongfully enrich Defendants) and not to change their customers’ substantive economic position;

c. even if customers could qualify as being in a “trade or business” by buying in to Defendants’ solar energy scheme, their customers did not materially participate in that trade or business. A taxpayer “materially participates” in an activity only if the taxpayer’s involvement in the activity is regular, continuous, and substantial. If the taxpayer does not “materially participate” in a trade or business, the taxpayer may offset losses from the trade or business only against income the taxpayer earns from other passive activity. Defendants promote and execute the solar energy scheme in a way that their customers are not required to “materially participate” in any activity related to the scheme;

d. Defendants’ solar energy scheme is designed to avoid, and does avoid, putting their customers “at risk” for the purported full purchase price of their lenses. Whether or not a taxpayer is in a “trade or business,” an individual (among other qualified taxpayers) may be allowed to deduct losses from certain activity up to the amount that the taxpayer has “at risk” in the activity. The amount “at risk” is the amount of money that the taxpayer could lose in the activity, and includes money and property that the taxpayer contributes to the activity. A taxpayer is not “at risk” for amounts in an activity that the taxpayer borrows from “any person who has an interest in such activity” or is related to such an interested person; and

e. the lenses are not “energy property” for purposes of the § 48 energy credit. Among other qualifying requirements, “energy property” means equipment with respect to which depreciation is allowed, and “which uses solar energy [1] to generate electricity, [2] to heat or cool (or provide hot water for use in) a structure, or [3] to provide solar process heat.” Defendants promote and execute the solar energy scheme in a way that customers may not depreciate the lenses they purportedly purchase. Further, neither the lenses, nor any other equipment on the Installation, are (or have been) generating electricity, heating or cooling a structure, providing hot water for use in a structure, or providing solar process heat.

77. Accordingly, Defendants know or have reason to know that their customers are not entitled to claim the tax benefits that Defendants promote through their solar energy scheme.


Extract -
Doc 2 PDF file
https://www.scribd.com/doc/291081416/USA-v-RaPower-3-Et-Al-Doc-2-Filed-23-Nov-15