Court denies energy-efficiency and business deductions claimed by W-2 worker
Harris v. Commissioner, T.C. Memo. 2025-113, No. 30097-21., 2025 BL 394664, Court Opinion
The Tax Court rejected an employee’s use of section 179D and other deductions to wipe out wage income, sustained accuracy-related penalties, but declined to impose a two-year EITC ban.
Holding
The Tax Court held the taxpayer was not a “designer” eligible to take section 179D deductions, had no separate trade or business to support section 179 or depreciation deductions, and could not deduct unreimbursed employee expenses.
The IRS met the requirements for the section 6662(a) penalty. The taxpayer was ineligible for the 2016 EITC based on income, but the court did not impose a two-year EITC ban.
Why It Matters
Confirms employees cannot claim section 179D unless they substantiate qualifying “designer” work.
Reinforces that section 179 and depreciation require an active trade or business.
Restates that reimbursement rights block unreimbursed employee expense deductions.
Shows substantial understatement can sustain section 6662 penalties even when other arguments fail.
Clarifies courts will not impose an EITC ban without developed findings on reckless or intentional disregard.
Timeline
2016: Taxpayer works as employee of Lighting Unlimited; wages of $103,568. Files Schedule C with $74,000 “179D deduction assigned to me as designer.” Claims EITC.
2017: Continues as employee; wages of $153,106. Claims Schedule C depreciation and section 179 deduction of $44,606 and $108,500 “section 179D” expense; also claims unreimbursed employee business expenses on Schedule A.
June 28, 2018: Allocation forms signed naming taxpayer as “designer” for state-owned building projects; taxpayer testifies he paid ~$17,000 for his portion of an ICS study in July 2018.
June 21, 2021: IRS issues notice of deficiency for 2016 and 2017, with section 6662(a) penalties.
November 4, 2025: Memorandum opinion filed. Decision for the IRS.
Key Facts
Taxpayer was a full-time W-2 employee of Lighting Unlimited in 2016 and 2017. No separate business activity.
Employer provided benefits and reimbursement rights for travel and similar expenses.
ICS prepared a section 179D study for two Arizona government buildings; total deduction at the owner level was ~$850,000, with allocation forms listing taxpayer as a designer for portions ($177,982 and $105,322).
Taxpayer filed Schedules C reporting zero receipts but large “179D” and other deductions that eliminated wage income.
For 2016, claimed EITC; the taxpayer’s AGI exceeded the EITC limit once adjustments were made.
Penalty approvals under section 6751(b) were stipulated.
Statutory or Regulatory Framework
Section 179D: Allows an immediate deduction for energy-efficient commercial building property. For government-owned property, the deduction may be allocated to the “designer,” who is treated as the taxpayer for the deduction.
Section 162 and section 274(d): Permit ordinary and necessary business expenses, with strict substantiation for travel and similar costs. Expenses subject to reimbursement are not “necessary.”
Sections 167 and 179: Allow depreciation and expensing only for property used in a trade or business.
Section 6001: Requires taxpayers to substantiate deductions with records.
Treas. Reg. § 1.461-1(a)(1): Cash method taxpayers deduct in the year paid.
Section 67(a): Miscellaneous itemized deductions, including unreimbursed employee expenses, were subject to the 2% floor for 2017.
Section 6662(a): 20% accuracy-related penalty for negligence or substantial understatement.
Section 32 and Rev. Proc. 2015-53: EITC income thresholds and eligibility rules.
Section 6751(b): Written supervisory approval for penalties.
Arguments
Taxpayer argued:
He was a qualifying “designer” under section 179D, supported by allocation forms.
Unreimbursed expenses and section 179/depreciation were proper.
EITC was allowable for 2016.
IRS argued:
Taxpayer was not a “designer” under section 179D; the record showed no qualifying design work.
No separate trade or business existed to support section 179 or depreciation.
Unreimbursed employee expenses were barred by reimbursement policy and lack of substantiation.
Penalties were proper due to substantial understatement; supervisory approval was secured.
EITC was unavailable in 2016 due to income.
Court’s Reasoning
The record did not show the taxpayer performed qualifying “designer” activities such as creating technical specifications or programming sequences of operation. Allocation forms and self-serving testimony were insufficient.
Section 179D requires proof of design work. By contrast to Johnson, the taxpayer did not demonstrate analysis, modification, or specification of systems. The court found no qualifying design activity.
No Schedule C trade or business existed. The taxpayer’s activities were those of an employee. Section 179 and depreciation require business use.
Unreimbursed employee expenses were not deductible. The employer provided reimbursement rights, and the taxpayer did not substantiate expenses under section 274(d).
The claimed ~$17,000 ICS study payment in July 2018 could not be deducted in 2017 by a cash method taxpayer. The taxpayer also failed to show it was an ordinary and necessary expense of any business.
The IRS met its burden for penalties through substantial understatements and stipulated supervisory approval. The taxpayer failed to establish reasonable cause or good faith.
The 2016 EITC was not allowable given adjusted income. The two-year EITC ban was not imposed because the IRS did not develop findings of reckless or intentional disregard.
Forward-Looking Implications
Allocation forms alone are not enough for section 179D. Practitioners should secure records of specific design activities that create technical specifications.
Employees seeking 179D allocations must document qualifying work and clarify employment versus independent contractor status.
Reimbursement policies continue to block unreimbursed employee deductions. Employers’ policies and actual reimbursement practices should be reviewed before filing.
Penalty defenses require contemporaneous records and credible reliance or efforts to assess liability; unsupported positions invite section 6662 exposure.
Cash method timing rules will defeat deductions reported in the wrong year.
Result
Decision for the IRS. Deficiencies and section 6662(a) penalties for 2016 and 2017 sustained. No two-year EITC ban imposed.
The Takeaway
You can’t use section 179D just because a government project listed you on an allocation form. To qualify, you need to prove you actually did design work that meets the statute’s definition. Employees can’t use business deductions meant for independent contractors, and claiming big losses without proof or timing accuracy almost guarantees penalties.
List of Citations
Johnson v. Commissioner, 160 T.C. 18 (2023): Defines “designer” activities under section 179D and the type of technical work that qualifies.
Orvis v. Commissioner, 788 F.2d 1406 (9th Cir. 1986): Reimbursement rights defeat unreimbursed employee expense deductions.
Treas. Reg. § 1.461-1(a)(1): Cash method timing for deductions.
I.R.C. §§ 162, 167, 179, 179D, 274(d), 6001, 6662, 6751(b), 32: Governing statutory provisions applied by the court.