Rev. Rul. 79-356

ISSUES

Under the circumstances described below, is a grant paid by a state to the taxpayer pursuant to a residential "Solar Hot Water Initiative Program" (Program) includible in the taxpayer's gross income under section 61 of the Internal Revenue Code?

Does the taxpayer's expenditure for a Department of Housing and Urban Development (HUD) approved solar hot water system qualify for the tax credit under section 44C of the Code?

FACTS

Under the provisions of the Solar Heating and Cooling Demonstration Act of 1974, 42 U.S.C. 5501-5517 (1976), HUD developed the Program to encourage the development of the solar energy industry. The Program provides a specified amount in grants to be allocated to those states where high electric heating bills are being incurred and that have a strong interest in encouraging the use of solar energy in residences. Under the Program, participating states are authorized to disburse $400 per unit to single-family homeowners and builder/developers who install HUD approved solar hot water systems.

In 1978, the taxpayer installed in the taxpayer's principal residence a HUD approved solar hot water system and, thus, received a $400 grant. The cost of the solar hot water system qualified as a renewable energy source expenditure.

LAW AND ANALYSIS

Section 61 of the Code provides that, except as otherwise provided by law, gross income means all income from whatever source derived.

Section 44C(a) of the Code, added by section 101 of the Energy Tax Act of 1978, Pub. L. 95-618, 1978-3 C.B. (Vol. 2) 1, provides that, in the case of an individual, there shall be allowed as a credit against income tax for the taxable year an amount equal to the sum of (1) the qualified energy conservation expenditures, plus (2) the qualified renewable energy source expenditures.

Section 44C(c)(2) of the Code defines "renewable energy source expenditure" as an expenditure made on or after April 20, 1977, by the taxpayer for renewable energy source property installed in connection with a dwelling unit (i) which is located in the United States, and (ii) which is used by the taxpayer as the taxpayer's principal residence. Section 44C(c)(5) defines "renewable energy source property," in part, as property that can reasonably be expected to remain in service for at least five years.

Section 44C(e) of the Code provides that if a credit is allowed under section 44C for any expenditure with respect to any property, the increase in the basis of such property which would (but for section 44C(e)) result from such expenditure shall be reduced by the amount of the credit so allowed.

Section 1016 of the Code provides that a proper adjustment in respect of property shall in all cases be made for expenditure losses, receipts, or other items properly chargeable to capital account.

The Solar Heating and Cooling Demonstration Act of 1974, which established HUD's Program, contains no provision for exemption of the grants from federal income tax. Although the amount of the grant is not excludable from gross income, the cost of the solar water heating system meets the requirements of section 44C of the Code and qualifies for the credit provided by that section.

In adjusting the basis of the property pursuant to section 1016 of the Code, the increase in the basis of the property which would result from the expenditure for the solar water heating system shall be reduced by the amount of the credit allowed pursuant to section 44C(e).

HOLDINGS

The amount of the grant received by the taxpayer pursuant to HUD's Program is includible in the txapayer's gross income under section 61 of the Code.

In addition, since the installation of the particular solar hot water system in this case qualified as a renewable energy source expenditure, the taxpayer qualifies for the energy credit provided by section 44C of the Code.

Furthermore, the basis of the taxpayer's property is increased pursuant to section 1016 of the Code, but the basis is reduced by the amount of the credit allowed under section 44C.