                         T.C. Memo. 2009-99



                       UNITED STATES TAX COURT



                 KEVIN T. DOHERTY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6883-06.                 Filed May 14, 2009.



     Kevin T. Doherty, pro se.

     Catherine S. Tyson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:    Respondent determined deficiencies with

respect to petitioner’s Federal income tax of $26,455 for 2000

and $5,327 for 2001.   The issues for decision are:   (1) Whether

petitioner is entitled to certain deductions he claimed on

Schedules C, Profit or Loss From Business, relating to a pay

phone and automatic teller machine (ATM) activity for 2000 and
                              - 2 -

2001; (2) whether petitioner had unreported income from the pay

phone and ATM activity for 2001; (3) whether gross receipts from

the pay phone and ATM activity that petitioner reported on his

2000 Schedule C should be reclassified as other income; and (4)

whether petitioner is entitled to claim a disabled access credit

under section 441 for 2000 and 2001.

                        FINDINGS OF FACT

     The parties have stipulated some of the facts, which we

incorporate in our findings by this reference.   Petitioner

resided in Missouri when the petition was filed.

     In 1999 petitioner inherited from his father, Thomas Doherty

(Mr. Doherty), an interest in an Alpha Telcom, Inc. (Alpha

Telcom), program involving pay phones.   After receiving proceeds

from the Alpha Telcom pay phones, petitioner wanted to learn more

about the pay phones and contacted Alpha Telcom and Owen Snyder

(Mr. Snyder), Mr. Doherty’s and petitioner’s income tax preparer.

Petitioner asked Mr. Snyder to help him acquire additional pay

phones.

     On August 1, 1999, petitioner entered into an agreement with

ATC, Inc. (ATC), Alpha Telcom’s wholly owned subsidiary, entitled

“Telephone Equipment Purchase Agreement” (pay phone purchase




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
                                - 3 -

agreement) to purchase2 20 pay phones for $5,000 each.3

Petitioner paid Alpha Telcom $100,000 in accordance with the pay

phone purchase agreement.    Under the pay phone purchase

agreement, ATC was responsible for finding sites for and

installing the pay phones.    The pay phone purchase agreement

included an attachment entitled “Telephone Equipment List”; but

when petitioner signed the agreement, the attachment did not

identify the pay phones petitioner was purchasing.    The pay phone

purchase agreement stated that the “Phones have approved

installation under The [Americans] with Disabilities Act (ADA).”

     On the same day, petitioner entered into a 3-year agreement

with Alpha Telcom entitled “Telephone Services Agreement” (pay

phone service agreement).    Under the pay phone service agreement,

Alpha Telcom was responsible for collecting monthly revenue

generated by the pay phones, paying commissions and fees to

vendors, repairing and maintaining the pay phones, and making

necessary capital improvements.    In exchange for managing and

operating the pay phones, Alpha Telcom was entitled to 70 percent

of the monthly adjusted gross revenue from the pay phones.

However, if the monthly adjusted gross revenue did not exceed


     2
      We use the term “purchase” to mean that petitioner acquired
an interest in the pay phones for consideration, but our use of
the term should not be construed to mean that petitioner acquired
a depreciable interest in the pay phones.
     3
      In November 1999 petitioner purchased 20 additional pay
phones for a total of $100,000.
                               - 4 -

$58.34, petitioner would be entitled to 100 percent of the

revenue and would owe no monthly fee to Alpha Telcom.    In

addition, Alpha Telcom promised to pay petitioner a monthly base

amount of at least $58.34 per pay phone, and petitioner received

from Alpha Telcom several payments in that amount.

     The pay phone service agreement included an attachment

entitled “Buy Back Election” wherein Alpha Telcom agreed to buy

back the pay phones in exchange for a fixed price stated in the

attachment.   After 36 months Alpha Telcom would buy back any pay

phone for the full purchase price.

     In addition to the pay phones, petitioner also invested in

ATMs.   On July 17, 2000, petitioner entered into an agreement

with National Equipment Providers, LLC (NEP), entitled “Equipment

Purchase Agreement” (ATM purchase agreement) to purchase two ATMs

for $12,250 each.   The ATM purchase agreement included a right of

first refusal whereby petitioner would offer to sell the ATMs

back to NEP before selling them to a third party.    On the same

day, petitioner entered into an agreement with International

Technology System, Inc. (ITS), entitled “Service & Third Party

Administration Agreement” (ATM service agreement).    Under the ATM

service agreement, ITS was responsible for installing, operating,

and servicing the ATMs.

     On August 24, 2001, Alpha Telcom filed for bankruptcy under

chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court
                                 - 5 -

for the Southern District of Florida.    See Arevalo v.

Commissioner, 124 T.C. 244, 249 (2005), affd. 469 F.3d 436 (5th

Cir. 2006).   The case was later transferred to the U.S.

Bankruptcy Court for the District of Oregon.     Id.     On

September 10, 2003, the bankruptcy case was dismissed by motion

of Alpha Telcom.    Id.   The bankruptcy court held that it was “‘in

the best interest of creditors and the estate to dismiss so that

proceedings could continue in federal district court, where there

was a pending receivership involving debtors.’”        Id.

     In 2001 the Securities and Exchange Commission (SEC) brought

a civil enforcement action against Alpha Telcom in the U.S.

District Court for the District of Oregon.     Id.   The District

Court held that the pay phone program investment contract was

actually a security and that Alpha Telcom violated Federal law by

not registering the program with the SEC.     Id.; SEC v. Alpha

Telcom, Inc., 187 F. Supp. 2d 1250 (D. Or. 2002), affd. 350 F.3d

1084 (9th Cir. 2003).

Federal Income Tax Reporting

     For 2000 petitioner filed a Form 1040, U.S. Individual

Income Tax Return, that included a Schedule C relating to the pay

phone activity.    On the 2000 Schedule C petitioner reported gross

receipts or sales of $45,440 and claimed deductions for

depreciation ($101,440) and legal and professional services

($1,200).
                               - 6 -

     For 2001 petitioner filed a Form 1040 that included a

Schedule C relating to the pay phone activity.4    On the 2001

Schedule C, petitioner claimed a depreciation deduction of

$60,864.   Petitioner also attached to his Form 1040 a Form 3800,

General Business Credit, reporting a $2,829 general business

credit carryforward, but he did not use the credit to offset any

part of his 2001 Federal income tax liability.     Petitioner

attached to the 2001 Form 1040 a statement explaining that he

could not use a $5,000 disabled access credit claimed for 1999

and that $2,171 was carried back and used for 1998.     The

statement also explained that $2,829 was carried forward to 2000

and 2001 but could not be used for those years.5

     Petitioner filed a Form 1040X, Amended U.S. Individual

Income Tax Return, for 2000 reporting additional adjusted gross

income of $1,643.   He filed a second Form 1040X for 2000

reporting additional adjusted gross income of $47,083 and a

disabled access credit of $3,931.   In the Explanation of Changes

to Income, Deductions, and Credits on the second 2000 amended

return, petitioner explained that he had failed to claim a




     4
      The 2000 and 2001 Schedules C identify the Schedule C
activity as “Disabled ACC Phones” and do not refer to the ATMs
petitioner acquired in 2000.
     5
      The disabled access credit for 1999 presumably results from
the pay phones purchased in 1999.
                                 - 7 -

disabled access credit carryforward of $3,931 for 2000 and $1,069

for 1999.

     On February 8, 2006, respondent sent petitioner a notice of

deficiency for 2000 and 2001.    Respondent determined:   (1)

Petitioner was not entitled to the depreciation deductions he

claimed on his 2000 and 2001 Schedules C; (2) petitioner was not

entitled to a deduction for legal and professional services

claimed on his 2000 Schedule C; (3) petitioner had unreported

income from Alpha Telcom of $45,440 and $26,297 for 2000 and

2001, respectively; and (4) petitioner was not entitled to the

disabled access credits claimed in 2000 and 2001.6   Respondent

also made several computational adjustments.   Petitioner filed a

petition contesting respondent’s determinations.

                                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




     6
      In the notice of deficiency respondent disallowed the
disabled access credits for 2000 and 2001. Petitioner claimed a
disabled access credit carryforward in 2001; but because
petitioner owed no tax liability, he did not use the credit in
calculating his tax liability on the return.
                                - 8 -

title.   Arevalo v. Commissioner, supra at 251.7   It is well

established that 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

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

ownership required for them to claim depreciation deductions



     7
      In his brief petitioner repeatedly argues 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). Petitioner is mistaken. At trial we simply stated
that respondent’s pretrial memorandum was not evidence in this
case. We did not indicate that we would refrain from relying on
relevant cases in our opinion.
                               - 9 -

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 such as

petitioner who invested in Alpha Telcom pay phones held the

benefits and burdens 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 to the property; and (8) which party receives the

profits from the operation and sale of the property.

     Petitioner 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 pay phone locations came from Alpha

Telcom.8   Alpha Telcom controlled the location of and entered


     8
      When petitioner signed the pay phone purchase agreement,
the attached telephone equipment list did not identify the pay
phones petitioner was purchasing. Moreover, after Alpha Telcom
filed for bankruptcy, petitioner did not take possession of the
                                                   (continued...)
                               - 10 -

into site agreements for the pay phones, collected monthly

revenues, paid vendor commissions and fees, and repaired and

maintained the pay phones.    Alpha Telcom was entitled to 70

percent of the monthly adjusted gross revenues as long as they

exceeded $58.34.    The record does not show that petitioner paid

any property taxes, insurance premiums, or license fees with

respect to the pay phones.

     Petitioner also bore no risk of loss with respect to the pay

phones.    Alpha Telcom agreed to buy back the pay phones from

petitioner for a fixed price stated in the pay phone purchase

agreement.    Alpha Telcom often paid petitioner a base amount of

$58.34 per month regardless of pay phone profits.

     Petitioner also received only bare legal title to the ATMs.

He never took possession of the ATMs, nor could he specify the

locations of the ATMs other than identifying them as somewhere in

Florida.    Petitioner testified that the ATMs were tied to Alpha

Telcom and that Alpha Telcom gave him pictures of what the ATMs

looked like.    When petitioner stopped receiving checks for his

ATMs, he called someone in Texas who told him that NEP had moved

the ATMs to a warehouse in Texas.    Although petitioner testified

that he made several telephone calls to discover what happened to

his ATMs after the Alpha Telcom bankruptcy, petitioner never


     8
      (...continued)
pay phones, and he could not credibly explain what happened to
them.
                                - 11 -

hired a lawyer or tried to take legal action to retrieve his

ATMs.

      After analyzing the purchase and service agreements with

respect to both the pay phones and the ATMs and the facts and

circumstances of this case, we conclude that the factors weigh

against petitioner.     Petitioner never received the benefits and

burdens of ownership with respect to the pay phones and the ATMs.

Therefore, we sustain respondent’s determination disallowing

petitioner’s 2000 and 2001 depreciation deductions.

II.   Legal and Professional Services

        In addition to the depreciation deductions, petitioner

claimed on his 2000 Schedule C a deduction for legal and

professional services.     In the notice of deficiency respondent

disallowed this deduction on the ground that the pay phone

activity was not a business.

        Section 162(a) authorizes a deduction for all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.       To be engaged in a trade or

business with respect to which deductions are allowable under

section 162, the taxpayer must be involved in the activity with

continuity and regularity, and the taxpayer’s primary purpose for

engaging in the activity must be for income or profit.

Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).
                               - 12 -

     As we have already stated, petitioner never received the

benefits and burdens of ownership with respect to the pay phones

or the ATMs that would entitle him to the incidents of taxation

attributable to their ownership.   Because petitioner never had

the benefits and burdens of owning the pay phones or the ATMs and

did not conduct any business involving the pay phones and the

ATMs, we conclude that he was not engaged in a trade or business

with respect to the pay phone and ATM activity.   And because

petitioner did not introduce any evidence regarding the nature of

the services and their connection, if any, with the income

generated by the pay phone and ATM activity, petitioner has

failed to show that he was entitled to deduct these expenses

under section 212.9   We hold that petitioner is not entitled to

the deduction for legal and professional services claimed on his

2000 Schedule C.

III. Alpha Telcom Income

     Respondent argues that the $45,440 of gross receipts or

sales reported on petitioner’s 2000 Schedule C should be

reclassified as other income on his Form 1040 because petitioner

was not engaged in a trade or business.   We agree.   As we have

already stated, petitioner’s pay phone and ATM activity was not a

trade or business.    Thus, any moneys received from the pay phone


     9
      Sec. 212 provides that an individual is allowed as a
deduction all the ordinary and necessary expenses incurred during
the taxable year for the production or collection of income.
                                 - 13 -

and ATM activity reported on petitioner’s 2000 Schedule C are

miscellaneous items of gross income and should be reported as

other income on his Form 1040.     See sec. 1.61-14, Income Tax

Regs.

      Respondent also argues that petitioner received in 2001 but

did not report $26,297 from Alpha Telcom.     The parties introduced

in evidence statements of pay phone revenue and expenses for 2001

showing that petitioner received revenue from Alpha Telcom for

the pay phones during 2001.     Moreover, petitioner does not argue

that he did not receive the Alpha Telcom income in 2001 as

respondent contends.     Thus, we sustain respondent’s

determinations.

IV.   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

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
                                 - 14 -

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.10    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

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.     Petitioner did not own, lease, lease



     10
      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 purpose. See sec. 44(c)(3).
                               - 15 -

to, or operate public accommodations with respect to the pay

phone and ATM activity.   Therefore, petitioner was not obligated

to comply with ADA requirements and did not make any eligible

access expenditures with respect to the pay phone and ATM

activity.11   We conclude that petitioner is not entitled to the

disabled access credit carryforward claimed in 2000 and 2001.

     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.

     To reflect the foregoing,


                                         Decision will be entered

                                    for respondent.




     11
      Petitioner cites Hubbard v. Commissioner, T.C. Memo. 2003-
245, in support of his argument that he is entitled to a disabled
access credit for the pay phones and the ATMs. However, Hubbard
is distinguishable from this case. In Hubbard, unlike here, the
taxpayers maintained a place of public accommodation and thus
were required to comply with ADA requirements.
