                         T.C. Memo. 2009-97



                       UNITED STATES TAX COURT



         OWEN D. SNYDER AND LILLIE M. SNYDER, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15222-05.               Filed May 14, 2009.



     Owen D. Snyder and Lillie M. Snyder, pro sese.

     Catherine S. Tyson, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:    Respondent determined deficiencies and

accuracy-related penalties under section 6662(a)1 with respect to

petitioners’ Federal income tax as follows:


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                   - 2 -

                                                  Penalty
     Year             Deficiency                 sec. 6662

     1999               $17,633                  $3,526.60
     2000                14,966                   2,993.20
     2001                14,386                   2,877.20

After a concession,2 the issues for decision are:    (1) Whether

petitioners are entitled to depreciation deductions claimed on

Schedules C, Profit or Loss From Business, of their Forms 1040,

U.S. Individual Income Tax Return, relating to a pay phone and

automatic teller machine (ATM) activity for 1999-2001; (2)

whether gross receipts from the pay phone and ATM activity that

petitioners reported on their 1999-2001 Schedules C should be

reclassified as other income; (3) whether petitioners are

entitled to claim a disabled access credit under section 44 for

1999-2001; and (4) whether petitioners are liable for the section

6662(a) accuracy-related penalty for 1999-2001.

                          FINDINGS OF FACT

     The parties have stipulated some of the facts, which we

incorporate in our findings by this reference.    Petitioners

resided in Missouri when the petition was filed.

Background

     Owen D. Snyder (Mr. Snyder) has been preparing income tax

returns since 1960.   Mr. Snyder obtained a degree in economics



     2
      Respondent concedes the adjustments in the notice of
deficiency shown as “Schedule C - Total expense (math error)” for
1999-2001.
                                - 3 -

from Washington University and attended Washington University Law

School for 1 year.   He joined the military, and after receiving

an honorable discharge, he took summer law courses at the

University of Wisconsin but never obtained a law degree.

Thereafter, Mr. Snyder worked for General American Life Insurance

Co. and then A.G. Edwards.

     While at A.G. Edwards, Mr. Snyder had the opportunity to

take over his aunt’s tax preparation business after she suffered

a stroke.   He attended night courses taught by a tax attorney at

Washington University and began his tax preparation business.

In 1966 Mr. Snyder became an enrolled agent entitled to practice

before the Internal Revenue Service, and his enrollment remains

in good standing.

     Around 1997 Mr. Snyder received a postcard from Alpha

Telcom, Inc. (Alpha Telcom), marketing a “New Tax Favored

Program” that promised to “Eliminate Your Client’s Tax Problems”

and also promised 10- to 17-percent commissions to sales

representatives.    Mr. Snyder contacted Alpha Telcom by telephone

and spoke with Alpha Telcom’s chief marketer, Charles Tummino

(Mr. Tummino).   Mr. Snyder told Mr. Tummino that he was not

interested because he knew about the Paramount pay phone

litigation where an investment contract for pay phones was deemed

a security, but Mr. Tummino assured Mr. Snyder that Alpha

Telcom’s program addressed the problems associated with the
                               - 4 -

Paramount pay phone litigation.   Alpha Telcom sent him a video

and a brochure explaining the pay phone program.

     Mr. Snyder again spoke with Mr. Tummino and requested

something signed in writing from an attorney or a certified

public accountant involved in the Alpha Telcom program.    Mr.

Snyder received various forms of information from Alpha Telcom,

including Alpha Telcom brochures, several letters from attorneys

and from Perkins & Co., P.C., an accounting and business

consulting firm,3 addressed to Paul Rubera, president of Alpha

Telcom, and résumés of two attorneys who were supposedly involved

in the Alpha Telcom program.   Mr. Snyder also paid for and

received a Dun & Bradstreet Business Information Report regarding

Alpha Telcom.

     Mr. Snyder became an authorized sales representative for

Alpha Telcom after taking an examination.   He provided

information about the Alpha Telcom program to some of his

clients.   After some of them invested in the program, Mr. Snyder

began receiving commissions of 10 to 18 percent of his clients’

investments in the Alpha Telcom program.    Mr. Snyder advised the

clients on the benefits of depreciation deductions and of the

disabled access credit in connection with their investments in

the Alpha Telcom program.


     3
      The letters addressed whether the Alpha Telcom program
investment contract was a security and whether Alpha Telcom pay
phone owners qualified for the disabled access credit.
                                 - 5 -

     Mr. Snyder invested approximately $49,000 of his own money

in 11 Alpha Telcom pay phones.    He never personally saw the pay

phones he purchased4 but relied on photographs of the phones

provided by Alpha Telcom.    Mr. Snyder entered into a service

agreement with a service provider related to Alpha Telcom that,

under the terms of the agreement, was responsible for, among

other things, collecting and reporting the revenues generated by

the pay phones.    Mr. Snyder did not take any steps to ensure or

confirm that the service provider correctly reported the revenue.

     In addition to the pay phones, in 2000 Mr. Snyder invested

in one ATM for $12,250 from National Equipment Providers, L.L.C.

(NEP).    The ATM did not dispense cash but instead dispensed

coupons that were exchangeable for cash in stores.     Mr. Snyder

entered into a service agreement with a service provider to

service the ATM, and the service provider was responsible for

selecting the location for the ATM.      Mr. Snyder began receiving

$100 per month for the ATM.    However, Mr. Snyder was dissatisfied

with the monthly payments from the service provider, and he

wanted to move the ATM from California to South Carolina.     In

2003 Mr. Snyder sold the ATM to ATM Network Services, Inc., for

$2,000.



     4
      We use the term “purchase” to mean that Mr. Snyder acquired
an interest in the pay phones for consideration, but our use of
the term should not be construed to mean that Mr. Snyder acquired
a depreciable interest in the pay phones.
                               - 6 -

Federal Income Tax Reporting

     For 1999 petitioners filed a Form 1040 that included a

Schedule C for Mr. Snyder’s tax preparation business.5    On the

Schedule C petitioners claimed a $19,568 depreciation deduction.

A detail sheet attached to the Schedule C showed that $19,360 of

the depreciation deduction related to the Alpha Telcom pay phones

and the balance related to office furniture and a laser printer.

Petitioners also attached to their Form 1040 a Form 8826,

Disabled Access Credit, claiming a $3,484 disabled access credit

for 1999,6 which they used to offset their 1999 Federal income

tax liability.

     For 2000 petitioners filed a Form 1040 that included a

Schedule C for Mr. Snyder’s tax preparation business.    On the

Schedule C petitioners claimed a $7,973 depreciation deduction.

Petitioners also attached a Form 4562, Depreciation and

Amortization (Including Information on Listed Property), with a

supplement.   The Form 4562 supplement showed that $7,250 of the

depreciation deduction related to the ATM, $416 related to the

Alpha Telcom pay phones, and the balance related to the office

furniture and the laser printer.   Petitioners also claimed a



     5
      Petitioners claimed the income and depreciation deduction
relating to the pay phone and ATM activity on their Schedule C
for Mr. Snyder’s tax preparation business.
     6
      On the Form 8826, petitioners claimed total eligible access
expenditures of $25,000 for 1999.
                               - 7 -

$5,000 current year disabled access credit on Form 8826.    That

credit was used to calculate petitioners’ general business credit

of $3,372 for 2000.7

     For 2001 petitioners filed a Form 1040 that included a

Schedule C on which they claimed a $1,134 depreciation deduction

and a $3,905 disabled access credit.8

     On July 29, 2005, respondent sent petitioners a notice of

deficiency for 1999-2001.   In the notice respondent determined

the following:   (1) Petitioners were not entitled to the

depreciation deductions they claimed on their 1999-2001 Schedules

C; (2) petitioners did not report on their 1999-2001 Forms 1040

other income shown on Forms 1099-MISC, Miscellaneous Income, from

Alpha Telcom; (3) petitioners were not entitled to the disabled

access credit claimed on their 1999-2001 Forms 1040; and (4)

petitioners were liable for an accuracy-related penalty under

section 6662(a) for 1999-2001.9   Petitioners filed a petition

contesting respondent’s determinations.




     7
      On Form 3800, General Business Credit, petitioners claimed
the $5,000 credit reported on the Form 8826, a $1,516
carryforward of a general business or ESOP credit to 2000, and a
$1,516 carryback of a general business credit from 2001.
     8
      Neither the 2001 Form 1040 nor its attachments were
introduced into evidence.
     9
      Respondent also proposed several computational adjustments.
                                - 8 -

                               OPINION

I.   Depreciation Deductions

     Section 167(a) generally allows a depreciation deduction for

the exhaustion and wear and tear of property used in a trade or

business or property held for the production of income.

Depreciation deductions are based on an investment in and actual

ownership of property rather than on possession of bare legal

title.    Arevalo v. Commissioner, 124 T.C. 244, 251 (2005), affd.

469 F.3d 436 (5th Cir. 2006).10   The mere transfer of legal title

does not transfer the incidents of taxation attributable to

property ownership where the transferor retains significant

control over the property.    See Crooks v. Commissioner, 453 F.3d

653, 656 (6th Cir. 2006); Arevalo v. Commissioner, supra at 251;

see also Frank Lyon Co. v. United States, 435 U.S. 561, 572-573

(1978).

     A taxpayer is entitled to depreciation deductions with

respect to property only if the benefits and burdens of owning

the property have passed to the taxpayer.    Arevalo v.

Commissioner, supra at 251.    Whether the taxpayer has received



     10
      In their brief petitioners repeatedly argue that we stated
during trial that in deciding this case we would not rely on
Arevalo v. Commissioner, 124 T.C. 244 (2005), affd. 469 F.3d 436
(5th Cir. 2006), and Crooks v. Commissioner, 453 F.3d 653 (6th
Cir. 2006). Petitioners are mistaken. At trial we simply stated
that the parties’ pretrial memoranda are not evidence in this
case. We did not indicate that we would refrain from relying on
relevant cases in our opinion.
                                - 9 -

the benefits and burdens of ownership is a question of fact that

must be determined from the parties’ intent as established by

written agreements read in the light of the attending facts and

circumstances.   Id. at 251-252; Grodt & McKay Realty, Inc. v.

Commissioner, 77 T.C. 1221, 1237 (1981).      This Court and several

Courts of Appeals have held that taxpayers who invested in Alpha

Telcom pay phones did not receive the benefits and burdens of

owning the pay phones that were required to claim depreciation

deductions under section 167.    Crooks v. Commissioner, supra at

656; Arevalo v. Commissioner, supra at 253; Sita v. Commissioner,

T.C. Memo. 2007-363, affd. without published opinion 103 AFTR 2d

2009-1174, 2009-1 USTC par. 50,275 (7th Cir. 2009).

     In Arevalo v. Commissioner, supra at 252, we identified

eight factors for determining whether a taxpayer who invested in

Alpha Telcom pay phones, like Mr. Snyder, held the burdens and

benefits of owning the pay phones.      Those factors include:   (1)

Whether legal title passes; (2) how the parties treat the

transaction; (3) whether an equity was acquired in the property;

(4) whether the contract creates a present obligation on the

seller to execute and deliver a deed and a present obligation on

the purchaser to make payments; (5) whether the right of

possession is vested in the purchaser; (6) which party pays the

property taxes; (7) which party bears the risk of loss or damage
                               - 10 -

to the property; and (8) which party receives the profits from

the operation and sale of the property.   Id.

     Mr. Snyder received only bare legal title to the pay phones.

He never had control over or possession of the pay phones, and

all information regarding the existence and location of the pay

phones came from Alpha Telcom.11   Alpha Telcom controlled the

location of the pay phones and entered into site agreements for

them, collected monthly revenues, paid vendor commissions and

fees, and repaired and maintained the pay phones.   If the monthly

adjusted gross revenues exceeded the base amount, Alpha Telcom

was entitled to 70 percent of the revenues.12   If the monthly

adjusted gross revenues were equal to or less than the base

amount, Mr. Snyder was entitled to 100 percent of the revenues

and owed no monthly fee.13   The record does not show that Mr.

Snyder paid any property taxes, insurance premiums, or license

fees with respect to the pay phones.




     11
      Although Mr. Snyder testified that he called the
businesses where his pay phones were supposedly located, he never
made any further effort to establish that his pay phones existed
in those locations. Moreover, after Alpha Telcom filed for
bankruptcy, Mr. Snyder did not take possession of the pay phones.
     12
      The telephone service agreement that Mr. Snyder signed is
not in the record. However, Mr. Snyder testified that he
selected option or level 4, which generally provided as
summarized above.
     13
      Alpha Telcom often paid Mr. Snyder a base amount of $46.67
or $58.34 regardless of pay phone revenue.
                              - 11 -

      Mr. Snyder also received only bare legal title to the ATM.

He never took possession of the ATM, and he received only a fixed

monthly check of $100 regardless of the revenue the ATM

generated.

      After analyzing the facts and circumstances surrounding the

pay phones and ATM in which Mr. Snyder invested, we conclude that

the factors weigh against him.   Mr. Snyder never received the

benefits and burdens of ownership with respect to the pay phones

and the ATM.   Therefore, we sustain respondent’s determination

disallowing petitioners’ 1999-2001 depreciation deductions.14

II.   Alpha Telcom Income

      Respondent argues that petitioners should have reported the

gross receipts with respect to Mr. Snyder’s Alpha Telcom pay

phones as other income on their 1999-2000 Form 1040 instead of

reporting them on their Schedules C.15   We agree.   As we have


      14
      Respondent disallowed all depreciation deductions claimed
on petitioners’ 1999-2001 Schedules C, including minor amounts of
depreciation for office furniture and a laser printer. Although
the record does not show whether the depreciation for the office
furniture and the laser printer related to the pay phone/ATM
activity or Mr. Snyder’s tax preparation business, petitioners
introduced no evidence to substantiate the depreciation for those
items. Thus, we sustain respondent’s determination disallowing
all depreciation deductions for 1999-2001. See Rule 142(a);
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
      15
      In the notice of deficiency respondent determined that
Alpha Telcom issued petitioners Forms 1099-MISC, Miscellaneous
Income, showing petitioners received $3,020, $13,424, and
$25,360, for 1999, 2000, and 2001, respectively. Although
respondent did not introduce the Forms 1099-MISC in evidence, the
                                                   (continued...)
                               - 12 -

already stated, Mr. Snyder never received the benefits and

burdens of ownership with respect to the pay phones and the ATM

that would entitle him to the incidents of taxation attributable

to their ownership.   Because Mr. Snyder never had the benefits

and burdens of owning the pay phones or the ATM and did not

conduct a business involving the pay phones or the ATM, we

conclude that he was not engaged in a trade or business with

respect to the pay phone/ATM activity.   Consequently, we sustain

respondent’s determination that the Alpha Telcom income, which

apparently was included in the gross receipts reported on Mr.

Snyder’s Schedules C, should have been reported on petitioners’

Forms 1040 as other income.   See sec. 1.61-14, Income Tax Regs.

III. Disabled Access Credit

     For purposes of the general business credit under section

38, section 44(a) provides a disabled access credit for certain

small businesses.   The amount of the credit is equal to 50

percent of the “eligible access expenditures” of an “eligible

small business” that exceed $250 but that do not exceed $10,250

for the year.   Sec. 44(a).   To claim the credit, a taxpayer must

show that (1) the taxpayer is an “eligible small business” during



     15
      (...continued)
parties stipulated Mr. Snyder’s bank checking account records
showing that he received monthly payments from Alpha Telcom in
those years. Moreover, petitioners concede in their brief that
the Alpha Telcom income reported on Forms 1099-MISC was included
in gross receipts or sales on their Schedules C.
                                 - 13 -

the year, and (2) the taxpayer has made “eligible access

expenditures” during the year.

     The term “eligible small business” means a taxpayer who

elects the application of section 44 and had gross receipts of no

more than $1 million or no more than 30 full-time employees

during the preceding year.     Sec. 44(b).   The term “eligible

access expenditure” means amounts paid or incurred to enable an

eligible small business to comply with the requirements under the

ADA.16    Sec. 44(c)(1).   Only a taxpayer who has an obligation to

comply with the ADA requirements can make an eligible access

expenditure.    As relevant here, the ADA requirements apply to (1)

persons who own, lease, lease to, or operate certain “public

accommodations” and (2) “common carriers” of telephone voice

transmission services.     See 42 U.S.C. sec. 12182(a) (2006);    47

U.S.C. sec. 225(c) (2006).

     This Court and several Courts of Appeals have held that

taxpayers who invested in Alpha Telcom pay phones did not have an



     16
      Eligible access expenditures include amounts paid or
incurred (1) for removing architectural, communication, physical,
or transportation barriers that prevent a business from being
accessible to, or usable by, individuals with disabilities; (2)
to provide qualified interpreters or other effective methods of
making aurally delivered materials available to individuals with
hearing impairments; (3) to acquire or modify equipment or
devices for individuals with hearing impairments; or (4) to
provide other similar services, modifications, materials, or
equipment. Sec. 44(c)(2). However, eligible access expenditures
do not include expenditures that are not necessary to accomplish
such purposes. See sec. 44(c)(3).
                                 - 14 -

obligation to comply with the requirements set forth in the ADA.

Crooks v. Commissioner, 453 F.3d at 657; Arevalo v. Commissioner,

124 T.C. at 257-258; Sita v. Commissioner, T.C. Memo. 2007-363.

This case is no different.     Mr. Snyder did not own, lease, lease

to, or operate a public accommodation with respect to the pay

phone and ATM activity.      Therefore, Mr. Snyder was not obligated

to comply with ADA requirements, and he did not make any eligible

access expenditures with respect to the pay phone and ATM

activity.   We conclude that petitioners are not entitled to the

disabled access credit for 1999-2001.

IV.   Section 6662 Penalty

      Respondent determined that petitioners are liable for the

accuracy-related penalty under section 6662 for 1999-2001.

Respondent asserts that petitioners are liable for the section

6662 penalty for each year on alternative grounds:     (1) The

underpayment is attributable to negligence or disregard of rules

or regulations within the meaning of section 6662(b)(1); or (2)

there was a substantial understatement of income tax within the

meaning of section 6662(b)(2).

      Section 6662(a) and (b)(1) authorizes the Commissioner to

impose a penalty in an amount equal to 20 percent of the

underpayment attributable to negligence or disregard of rules or

regulations.   Negligence is defined as any failure to make a

reasonable attempt to comply with the provisions of the Internal
                                - 15 -

Revenue Code.    Sec. 6662(c); see also Neely v. Commissioner, 85

T.C. 934, 947 (1985) (negligence is lack of due care or failure

to do what a reasonable and prudent person would do under the

circumstances).    Negligence is strongly indicated where a

taxpayer fails to make a reasonable attempt to ascertain the

correctness of a deduction, credit, or exclusion on a return

which would seem to a reasonable and prudent person to be “too

good to be true” under the circumstances.     Sec. 1.6662-

3(b)(1)(ii), Income Tax Regs.

     Section 6662(a) and (b)(2) authorizes the Commissioner to

impose a 20-percent penalty if there is a substantial

understatement of income tax.     A substantial understatement of

income tax with respect to an individual taxpayer exists if the

amount of the understatement for the taxable year exceeds 10

percent of the tax required to be shown on the return for the

taxable year or $5,000, whichever is greater.     Sec.

6662(d)(1)(A).

     The Commissioner bears the initial burden of production with

respect to a taxpayer’s liability for the section 6662 penalty,

in that the Commissioner must first produce sufficient evidence

to establish that the imposition of the section 6662 penalty is

appropriate.    Sec. 7491(c).   If the Commissioner satisfies his

initial burden of production, the burden of producing evidence to

refute the Commissioner’s determination and to establish that the
                               - 16 -

taxpayer is not liable for the section 6662 penalty shifts to the

taxpayer.    See Higbee v. Commissioner, 116 T.C. 438, 447 (2001).

     Respondent has carried his burden of production by showing

that Mr. Snyder did not make a reasonable effort to evaluate

whether his arrangement with Alpha Telcom entitled him to the

depreciation deductions and disabled access credits that

petitioners claimed on their 1999-2001 tax returns.

Alternatively, respondent has carried his burden of production by

showing that petitioners substantially understated their 1999-

2001 Federal income tax.   Because respondent met his burden of

production, petitioners must come forward with sufficient

evidence to persuade the Court that respondent’s determination is

incorrect.   See id. at 446-447.

     Petitioners’ arguments in support of their position that

they are not liable for the section 6662 penalty are neither

precise nor clear.   Petitioners do not contend that there was no

substantial understatement of income tax for the years at issue

or that they satisfy the adequate disclosure and substantial

authority provisions of section 6662.   See sec. 6662(d)(2)(B).

Petitioners’ arguments focus primarily on the reasonableness of

Mr. Snyder’s investigation into Alpha Telcom and the pay

phone/ATM programs that it and its affiliated companies were
                               - 17 -

marketing.17   Reasonably construed, the arguments require us to

consider whether petitioners may be excused from liability for

the section 6662 penalty because they qualify for relief under

section 6664(c)(1).   Section 6664(c)(1) provides that no penalty

shall be imposed under section 6662 with respect to any portion

of an underpayment if it is shown that there was reasonable cause

for that portion and that the taxpayer acted in good faith with

respect to that portion.

     The record does not support a finding that Mr. Snyder made a

reasonable effort to investigate the Alpha Telcom program and

its tax ramifications before he made his investment in the

program or that Mr. Snyder had reasonable cause and acted in good

faith within the meaning of section 6664(c)(1).   Although Mr.

Snyder requested information about the pay phone and ATM programs

from Alpha Telcom and/or NEP and received copies of documents

generated by various attorneys and by an accounting and business

consulting firm addressed to Alpha Telcom and/or NEP,18 all of

the information he received came from Alpha Telcom, NEP, or

professionals who were advising the companies promoting the

programs.   Although Mr. Snyder made an effort to find out whether



     17
      Petitioners’ arguments also focus on respondent’s
allegedly abusive behavior in attacking the Alpha Telcom
programs.
     18
      Mr. Snyder also obtained a Dun & Bradstreet report on
Alpha Telcom.
                             - 18 -

an investment contract for the program would be treated as a

security, he did not conduct any independent research regarding

whether the pay phone/ATM program as structured would qualify as

a business, whether his interests in the pay phones and the ATM

were depreciable interests, and whether the activity would

satisfy the requirements of section 44.   Mr. Snyder, an

experienced return preparer, should have realized that his

unverified reliance on representations of the promoter and the

promoter’s advisers was not sufficient to protect him from

liability for the section 6662 penalty.   See, e.g., Vincentini v.

Commissioner, T.C. Memo. 2008-271; Rogers v. Commissioner, T.C.

Memo. 2005-248.

     Because petitioners failed to prove that they had reasonable

cause for the underpayments or that they acted in good faith

regarding the underpayments, we sustain respondent’s

determination and hold that petitioners are liable for the

section 6662 accuracy-related penalty with respect to their 1999-

2001 returns.

     We have considered all arguments raised by the parties, and

to the extent not discussed, we find them to be irrelevant, moot,

or without merit.


                                   Decision will be entered

                              under Rule 155.
