Building Designer Can't Claim Sec. 179D Deductions for Prior Years on Form 3115

(Parker Tax Publishing March 2025)

The Second Circuit affirmed the Tax Court and held that a designer of energy efficient buildings placed in service by government clients was not entitled to claim approximately $3.9 million in Code Sec. 179D deductions for its 2007-2010 tax years on its 2011 tax return and accompanying Form 3115 because it did not change its accounting method. The court also concluded that the plain language of Rev. Proc. 2011-14 requires that the Code Sec. 179D deductions be claimed in the tax year in which the property is placed into service. Cannon Corp. and Subs. v. Comm'r, 2025 PTC 58 (2d Cir. 2025).

Background

Under Code Sec. 179D, a building owner can deduct the cost of energy efficient commercial building property placed in service during the tax year. Since tax-exempt building owners cannot themselves claim this tax deduction, a separate provision of Code Sec.179D allows them to transfer the deduction to the designer of the energy efficient building. Specifically, Code Sec. 179D(d)(3)(A) provides that, in the case of energy efficient commercial building property installed on or in property owned by a specified tax-exempt entity, the IRS can issue guidance to allow the allocation of the deduction to the person primarily responsible for designing the property in lieu of the owner of such property. In such cases, that person is treated as the taxpayer for purposes of Code Sec. 179D.

Cannon Corporation designed energy efficient buildings that were placed into service by its government clients between 2006 and 2011. Those government clients allocated to Cannon their Code Sec. 179D deductions. Cannon did not, however, report any Code Sec. 179D deductions on its original tax returns for the 2006 to 2010 tax years. In September 2010, Cannon timely filed an amended 2006 tax return to claim those deductions for buildings its government clients placed into service in 2006. The IRS allowed those deductions and issued Cannon a tax refund.

According to Cannon, in January 2011, as it was preparing to file an amended 2007 tax return, the IRS published Rev. Proc. 2011-14, which generally provided procedures by which a taxpayer may obtain automatic consent for an accounting method change as to dozens of different types of deductions and income, including a change in method of accounting to deduct under Code Sec. 179D amounts paid or incurred for the installation of energy efficient commercial building property. In Rev. Proc. 2011-14, the IRS stated that the deduction for energy efficient commercial building property must be claimed in the tax year in which the property is placed in service and says under a subsection titled "Additional filing requirement" that, in the case of a publicly owned building for which a designer has been allocated a deduction under Code Sec. 179D, the designer becomes the taxpayer for purposes of the deduction and "must attach" certain documents. Cannon decided that it should report its Code Sec. 179D deductions for the 2007-2010 tax years as a change in accounting method on its 2011 tax return and corresponding Form 3115, Application for Change in Accounting Method, rather than file amended tax returns for those years.

In September of 2012, before Cannon filed its 2011 tax return, the IRS published Rev. Proc. 2012-39, which made clear that designers could not use the automatic change in method of accounting provisions of Rev. Proc. 2011-14 for Code Sec. 179D deductions allocated to them. Nevertheless, Cannon attempted to claim approximately $3.9 million in Code Sec. 179D deductions for the 2007-2010 tax years on its 2011 tax return, and reported those deductions as a Code Sec. 481(a) adjustment on an accompanying Form 3115. The IRS denied those deductions and issued Cannon a notice of deficiency for its 2011 tax year.

Cannon petitioned the Tax Court, asserting that it was entitled to the deductions for the 2007-2010 tax years on its 2011 tax return and accompanying Form 3115. According to Cannon, the IRS's confusing directives forced it to take protective measures and file a Form 3115 with its 2011 tax return along with a letter explaining its situation and requesting a change in its accounting method. Cannon claimed that the doctrines of equitable estoppel, equitable recoupment, and the duty of consistency allowed it to claim the Code Sec. 179D deductions. Equitable estoppel precludes a party from denying his own acts or representations which induced another to act to his detriment. Equitable recoupment prevents an inequitable windfall to either the taxpayer or government as a result of inconsistent treatment of a single transaction. Finally, under the duty of consistency, both the taxpayer and the IRS have a duty of consistency with their tax treatment of items.

The Tax Court granted summary judgment to the IRS and held that Cannon was not entitled to the Code Sec. 179D deductions as a Code Sec. 481(a) adjustment because Cannon did not change its accounting method. It further determined that Rev. Proc. 2011-14 did not help Cannon because its plain language required that the deduction be claimed in the tax year in which the property is placed into service. In addition, the Tax Court entered summary judgment against Cannon on its equitable estoppel, equitable recoupment, and duty of consistency claims, explaining that none of those equitable claims could prevail because the IRS never represented in Rev. Proc. 2011-14 or elsewhere that a designer could claim Code Sec. 179D deductions as an accounting method change. Cannon appealed to the Second Circuit arguing that the Tax Court erred in granting summary judgment.

Analysis

The Second Circuit affirmed the Tax Court for substantially the same reasons as were articulated by the Tax Court.

The Second Circuit found that Cannon improperly reported its Code Sec. 179D deductions for the 2007-2010 tax years on its 2011 tax return and accompanying Form 3115 as a Code Sec. 481(a) adjustment because the claiming of those deductions was not a change in accounting method. The court reasoned that, because the designer of an energy efficient building does not own the property - and consequently cannot take ordinary annual depreciation deduction on that property - a Code Sec. 179D deduction for purposes of the designer is not an acceleration of depreciation (as it would be for a building owner) but is instead a one-time allocated deduction that permanently reduces the designer's taxable income. Thus, Cannon could not report the approximately $3.9 million in Code Sec. 179D deductions for the 2007-2010 tax years as an accounting method change.

The court also found that Cannon's equitable estoppel claim failed because the IRS did not make any misrepresentations to Cannon and Cannon could not show otherwise. Nor, the court said, did the IRS engage in affirmative misconduct because the IRS never represented, in Rev. Proc. 2011-14 or elsewhere, that Cannon was entitled or obligated to report its Code Sec. 179D deductions from prior years as an accounting method change. For substantially the same reason, the court concluded that Cannon could not make an equitable recoupment or duty of consistency claim since Rev. Proc. 2011-14 does not direct designers to report Code Sec. 179D deduction from prior years as an accounting method change. Thus, the court found, Cannon's argument that it was taxed on inconsistent theories failed. In sum, the Second Circuit agreed with the Tax Court that none of Cannon's equitable claims survived summary judgment.

For a discussion of the Code Sec. 179D energy efficient commercial buildings deduction, see Parker Tax ¶96,555.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com