                  T.C. Summary Opinion 2005-121



                     UNITED STATES TAX COURT



        KENNETH R. DUNN AND DELIA H. DUNN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14991-03S.            Filed August 11, 2005.


     Kenneth R. Dunn and Delia H. Dunn, pro se.

     Lauren B. Epstein, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect when the petition was filed.   The decision

to be entered is not reviewable by any other court, and this

opinion should not be cited as authority.   Unless otherwise

indicated, all subsequent section references are to the Internal

Revenue Code (Code) in effect at relevant times, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
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       Respondent determined a deficiency of $11,362 in

petitioners’ Federal income tax for the taxable year 1999.      The

deficiency was due, in part, to respondent’s disallowance of a

depreciation deduction and disallowance of a tax credit regarding

petitioners’ investment in two pay telephones (pay phones).

       After concessions by the parties,1 the issues for decision

are:       (1) Whether petitioners are entitled to claim a deduction

for depreciation under section 167 for two pay phones in 1999;

(2) whether petitioners are entitled to claim a tax credit under

section 44 for their investment in the pay phones in 1999; and

(3) whether petitioners are entitled to claim a loss under

section 165(c)(2).

       We note that the Court recently issued an Opinion in the

case of Arevalo v. Commissioner, 124 T.C. 244 (2005).       The facts

in this case, relating to the investment in pay phones, are

virtually identical to the facts in Arevalo.       Thus, the Opinion

in Arevalo is controlling.

                                Background

       Some of the facts have been stipulated, and they are so

found.      The stipulation of facts and the attached exhibits are




       1
        The parties agree that petitioners were not entitled to a
sec. 179 deduction for a candy box business petitioners operated
during tax year 1999. The parties agree, however, that
petitioners were entitled to a depreciation deduction of $1,549
for the candy box business in that same year.
                               - 3 -

incorporated by this reference.   Petitioners resided in

Inverness, Florida, at the time the petition was filed.

     On October 14, 1999, petitioners entered into a contract

with ATC, Inc. (ATC), a wholly owned subsidiary of Alpha Telcom,

Inc. (Alpha Telcom), entitled “Telephone Equipment Purchase

Agreement” (ATC pay phone agreement).   Under the terms of the ATC

pay phone agreement, petitioners paid $10,000 to ATC, and ATC

provided petitioners with legal title to the “telephone

equipment” that was purportedly described in an attachment to the

ATC pay phone agreement, entitled “Telephone Equipment List”.

The attachment, however, did not identify any pay phones subject

to the agreement.   Only identification numbers, the location of

the pay phones, and sale prices were provided.   The ATC pay phone

agreement also included the following provision:

     1.   Bill of Sale and Delivery

          a. Delivery by Seller shall be considered complete
     upon delivery of the Equipment to such place designated by
     Owner.

          b. Owner agrees to take delivery of installed
     Equipment and location on site.

          c. Upon delivery, Owner shall acquire all rights,
     title and interest in and to the Equipment purchased.

          d. Owner authorizes ATC to enter into such site
     agreement as may be deemed necessary to secure site.

          e. Phones have approved installation under The
     American with Disabilities Act.
                              - 4 -

The “Buy Back Election” to the Alpha Telcom Telephone Services

Agreement (Alpha Telcom service agreement) stated:

     1.0. Buy Back Election: Owner shall have the right to
     sell to Alpha Telcom, Inc. each payphone upon the
     following terms and conditions: in the first six months between the eq
for the buy back election, the sale[s] price shall be the Owner’s
original purchase price less $625; in months 7 through 12, it
shall be the purchase price less $375; in months 13 through 24,
it shall be the purchase price less $250[;] in months 25 through
36, it shall be the purchase price less $125; and after 36
months, it shall be the full purchase price.

     An exhibit to the ATC pay phone agreement includes a list of

service providers available to maintain the pay phones should

petitioners not want to service the pay phones themselves.

Petitioners also had the option to enter into a service agreement

with Alpha Telcom (ATC, Inc. service selection form) if they did

not want to be involved in the day-to-day maintenance of the pay

phones.

     Under the terms of the Alpha Telcom service agreement, Alpha

Telcom agreed to service and maintain the pay phones for an

initial term of 3 years in exchange for 70 percent of the pay

phones’ monthly adjusted gross revenue.   In the event that a pay

phone’s adjusted gross revenue was less than $58.34 for the

month, Alpha Telcom would waive or reduce the 70-percent fee and

pay petitioners at least $58.34, so long as the equipment

generated at least that amount.   In the event that a pay phone’s

adjusted gross revenue was less than $58.34 for the month,
                               - 5 -

petitioners would receive 100 percent of the revenue.

Notwithstanding the terms of the Alpha Telcom service agreement,

Alpha Telcom made it a practice to pay $58.34 per month per pay

phone, regardless of how little income the pay phone produced.

Additionally, under the Alpha Telcom service agreement, Alpha

Telcom negotiated the site agreement with the owner or

leaseholder of the premises where the pay phones were to be

installed.   Alpha Telcom installed the pay phones, paid the

insurance premiums on the pay phones, collected and accounted for

the revenues generated by the pay phones, paid vendor commissions

and fees, obtained all licenses needed to operate the pay phones,

and took all actions necessary to keep the pay phones in working

order.   Petitioner Kenneth Dunn signed the Alpha Telcom service

agreement and the ATC, Inc. service selection form on October 14,

1999,2 the same day he signed the ATC pay phone agreement.

     Petitioners received an undated letter confirming their pay

phone order and a notice that an order had been placed for the

installation of the pay phones.   Petitioners were not able to

select the pay phones that would be assigned to them.

Petitioners, however, knew where the pay phones would be installed.


     2
        Mr. Dunn, as trustee, signed on behalf of petitioners for
the Kenneth R. Dunn & Delia H. Dunn Revocable Trust Agreement.
                               - 6 -

     Sometime in 1999, petitioners received a flyer from an

entity named Tax Audit Protection, Inc.    The flyer provided

information about Alpha Telcom pay phones.    It stated that owners

of Alpha Telcom pay phones qualified for tax credits for

compliance with the Americans with Disabilities Act of 1990

(ADA), Pub. L. 101-336, 104 Stat. 327, and that “owners of Alpha

Telcom payphones” could be eligible for tax credits of $2,500 per

phone, up to $5,000 maximum, per year.    The flyer identified a

person named George Mariscal as the president of the company.

     Alpha Telcom modified the pay phones to be accessible to the

disabled:   (1) By adjusting the cord length so that the pay

phones would be accessible to the wheelchair bound, and/or (2) by

installing volume controls to make them more useful to the

hearing impaired, and/or (3) by reducing the height at which the

pay phones were installed.   Alpha Telcom represented to investors

that the modifications made to the pay phones complied with ADA

requirements.   The ATC pay phone agreement states that “Phones

have approved installation under The * * * (ADA)”.    The undated

confirmation letter also states that “These phones qualify under

the 1990 Americans with Disabilities Act, as amended”.

Petitioners were not provided with a list of the modifications

that were made to the pay phones that were assigned to them, and

they did not know the cost of these modifications.
                               - 7 -

     On their 1999 Federal income tax return, petitioners claimed

on Schedule C, Profit or Loss From Business, a $10,000

depreciation deduction and a section 179 expense deduction with

respect to the pay phones.

     Petitioners claimed a $4,772 tax credit, with respect to the

pay phones, on Form 8826, Disabled Access Credit, that was

attached to their 1999 Federal income tax return.   For purposes

of claiming this credit, petitioners reported that they had

$10,000 of eligible access expenditures during 1999.

     Alpha Telcom grew rapidly through its pay phone program but

was poorly managed and ultimately operated at a loss.    On August

24, 2001, Alpha Telcom filed for bankruptcy under chapter 11 of

the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern

District of Florida.   The matter was later transferred to the

U.S. Bankruptcy Court for the District of Oregon on September 17,

2001.   On November 20, 2001, petitioners filed a proof of claim

in the bankruptcy court in the amount of $10,816.76, representing

the $10,000 that they had invested, plus 7 months of payments at

$58.34 per pay phone that they had not received from ATC as of

the claim date.   The bankruptcy matter was dismissed on September

10, 2003, by motion of Alpha Telcom.   The bankruptcy court held

that it was in the best interest of creditors and the estate to

dismiss the bankruptcy matter so that proceedings could continue

in Federal District Court, where there was a pending receivership
                                 - 8 -

involving debtors.     The receivership was the result of a civil

enforcement action brought by the Securities and Exchange

Commission (SEC) against Alpha Telcom in 2001 in the U.S.

District Court for the District of Oregon.     The District Court

appointed a receiver in September 2001 to take over the

operations of Alpha Telcom and to investigate its financial

condition.   On February 7, 2002, the District Court held that the

pay phone scheme was actually a security investment and that

Federal law had been violated by Alpha Telcom because the program

had not been registered with the SEC.      The U.S. Court of Appeals

for the Ninth Circuit affirmed this decision on December 5, 2003.

      Respondent disallowed the depreciation deduction petitioners

claimed because “the telephones are located in a place that * * *

[petitioners did] not own or operate as a trade or business” and

“* * * [petitioners] did not have a depreciable interest in the

payphone”.   Respondent also disallowed the disabled access credit

petitioners claimed because no business reason has been given or

verified for petitioners to comply with the ADA.

                              Discussion

I.   Burden of Proof

      Section 7491 is applicable to this case because the

examination in connection with this action was commenced after

July 22, 1998, the effective date of that section.     See Internal

Revenue Service Restructuring and Reform Act of 1998, Pub. L.
                                - 9 -

105-206, sec. 3001(c)(1), 112 Stat. 727.   Under section 7491, the

burden of proof shifts from the taxpayer to the Commissioner if

the taxpayer produces credible evidence with respect to any

factual issue relevant to ascertaining the taxpayer’s tax

liability.   Sec. 7491(a)(1).   However, section 7491(a)(1) applies

with respect to an issue only if the taxpayer has complied with

the requirements under the Code to substantiate any item, has

maintained all records required under the Code, and has

cooperated with reasonable requests by the Commissioner for

witnesses, information, documents, meetings, and interviews.      See

sec. 7491(a)(2)(A) and (B).

      Petitioners have not argued that they have satisfied any of

the criteria of section 7491(a)(1) or (2).   In any event, the

burden of proof does not play a role in the case before us,

because there is no dispute as to a factual issue.

II.   Depreciation Deduction

      As we indicated in Arevalo v. Commissioner, 124 T.C. at 251,

depreciation deductions are based on an investment in and actual

ownership of property rather than the possession of bare legal

title.   “A taxpayer has received an interest in property that

entitles the taxpayer to depreciation deductions only if the

benefits and burdens of ownership with respect to the property

have passed to the taxpayer.”    Id. (and cases cited thereat).
                              - 10 -

     In Arevalo, we discussed eight factors in considering the

substance, rather than the labels, of the agreement between the

taxpayer and the seller.   Just as we concluded in Arevalo, we

conclude here that the factors work against petitioners.

Petitioners did not have control over or possession of the pay

phones.   Petitioners did not have the power to select the

location of the pay phones or enter into site agreements with

owners or leaseholders of the premises where the pay phones were

to be located.   There is no evidence that petitioners paid any

property taxes, insurance premiums, or license fees.     There was

minimal risk because of the ability of petitioners to sell legal

title to the pay phones back to ATC at a fixed formula price.

Alpha Telcom was entitled, pursuant to the agreement, to receive

most of the profits from the pay phones.     At the time of the

bankruptcy of Alpha Telcom, petitioners did not take possession

of the pay phones or hire an alternative provider, but rather

filed a claim in bankruptcy court for the price of the pay phones

and monthly payments not received.     All responsibilities for

maintaining the pay phones and risks associated with the pay

phones’ producing insufficient revenues remained with Alpha

Telcom.   The transaction was more like a security investment than

a sale, whereby petitioners made a one-time payment to ATC in

return for an opportunity to receive a minimum annual return per

pay phone and the tax benefits of “ownership”.
                                    - 11 -

       For the identical reasons cited in Arevalo, we conclude that

petitioners did not receive the benefits and burdens of ownership

with respect to the pay phones.        See id. at 253.   Since

petitioners did not receive a depreciable interest in the pay

phones, they are not entitled to claim a depreciation deduction

under section 167.       See id.

III.    ADA Tax Credit

       In Arevalo, we discussed in some detail the interplay of the

general business credit under section 38 and the disabled access

credit under section 44(a).        Id. at 254.   We concluded that the

taxpayer’s investment in the pay phones did not constitute an

eligible access expenditure and thus found it unnecessary to

consider whether the taxpayer’s pay phone activities constituted

an eligible small business.        Id. at 255.   We explained that “In

order for an expenditure to qualify as an eligible access

expenditure within the meaning given that term by section 44(c),

it must have been made to enable an eligible small business to

comply with the applicable requirements under the ADA”.          Id. (and

cases cited thereat).

       We summarized in Arevalo as follows:

       any person who owns, leases, leases to, or operates a
       public accommodation is required to make modifications
       for disabled individuals in order to comply with the
       requirements set forth in ADA title III. While ADA
       title III does not define the terms “own”, “lease”,
       “lease to”, or “operate”, we must construe those terms
       in accord with their ordinary and natural meaning.
       See, e.g., Smith v. United States, 508 U.S. 223, 228
                                - 12 -

      (1993); Neff v. Am. Dairy Queen Corp., 58 F.3d 1063,
      1066 (5th Cir. 1995) (construing the term “operate”, as
      used in ADA title III, as follows: “To ‘operate,’ in
      the context of a business operation, means ‘to put or
      keep in operation,’ ‘to control or direct the
      functioning of,’ ‘to conduct the affairs of; manage,’”
      (citations omitted)). [Id. at 256.]

      Consistent with our conclusion in Arevalo, we conclude that

petitioners did not own, lease, or operate anything as a result

of their investment in the pay phones and were never under an

obligation to comply with the requirements of ADA title III

during the year in issue.     See id.    We further conclude, as we

did in Arevalo, that petitioners were under no obligation to

comply with ADA title IV during the year in issue, since

petitioners were not actively engaged in the provision of

services to anyone as a result of their investment in the pay

phones.    See id. at 257 (and cases cited thereat).

IV.   Loss

      Petitioners also raised the issue of whether they were

entitled to claim a loss under section 165(c)(2).      In support of

their claim, petitioners point to a letter they believed to have

been written by someone at the Internal Revenue Service, wherein

it is concluded that petitioners may be entitled to claim a loss

in 2001.     Petitioners have not established that they incurred a

loss in 1999, and we need not decide whether they incurred a loss

in a year not before the Court.
                            - 13 -

    Reviewed and adopted as the report of the Small Tax Case

Division.

    To reflect the foregoing and the concessions of the parties,



                                       Decision will be entered

                                  under Rule 155.
