                  T.C. Summary Opinion 2005-122



                     UNITED STATES TAX COURT



                ARTHUR R. KOSKELA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8129-04S.            Filed August 11, 2005.


     Arthur R. Koskela, pro se.

     Chris J. Sheldon, 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 in effect at relevant times.
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     Respondent determined deficiencies of $4,875, $4,875, and

$1,514 in petitioner’s Federal income taxes for the taxable years

2000, 2001, and 2002, respectively.     The deficiencies were due to

respondent’s disallowance of a tax credit regarding petitioner’s

investment in pay telephones (pay phones) for each of the years

in issue.

     The sole issue for decision is whether petitioner is

entitled to claim tax credits under section 44 for his

investments in the pay phones for 2000, 2001, and 2002.

     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 investments 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

incorporated by this reference.    Petitioner resided in Phoenix,

Arizona, at the time the petition was filed.

     Petitioner entered into three separate contracts dated

August 18, 2000, November 7, 2000, and January 2, 2001, with ATC,

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

(Alpha Telcom), entitled “Telephone Equipment Purchase Agreement”

(ATC pay phone agreements).
                               - 3 -

     Under the terms of the ATC pay phone agreements, petitioner

paid $5,000 per pay phone to ATC, and ATC provided petitioner

with legal title to the “telephone equipment” that was

purportedly described in an attachment to the ATC pay phone

agreements, entitled “Telephone Equipment List”.    The attachment,

however, did not identify any pay phones subject to the

agreements.   Only identification numbers, the locations of 2 of

the 11 pay phones, and sale prices were provided.   The ATC pay

phone agreements 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(s) as are
     designated by Owner.

         b. Owner agrees to take delivery of Equipment
     within (15) fifteen business days. If Seller has not
     delivered the equipment within (90) ninety days, Owner
     may terminate this Agreement upon Seller’s receipt of
     signed notice from Purchaser.

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

         d. Phones have approved installation under The
     American with Disabilities Act.

The “Buy Back Election” to the ATC pay phone agreements stated:

     1.0. Buy Back Election: Should Owner elect to sell any
     telephone equipment, itemized in Exhibit “A”, American
     Telecommunications Company, Inc., (hereinafter “Seller”),
     agrees to buy back such equipment from Owner, according to
     the following terms and conditions: 1) If exercise of the
     buy back election occurs in the first thirty-six months
     after the equipment delivery date, the re-sale price shall
     be the Owner’s original purchase price of $5,000.00, minus a
     “restocking fee” of (10%) ten percent of the purchase price;
     2) If the buy-back election is made more than (36) thirty-
                               - 4 -

     six months after the equipment delivery date, the sale price
     shall be the Owner’s original purchase price of $5,000.00,
     and there shall be no “restocking fee” for Purchaser’s
     election to re-sell the equipment purchased back to Seller.
     This “Buy Back Election” shall expire on the (84th) eighty-
     fourth month anniversary of Owner’s equipment delivery date.
     3) Seller, or its designee, reserves the right of first
     refusal as to the telephone equipment. If Owner enters into
     an agreement to sell the telephone equipment to any third
     party, Seller, or its designee, shall have thirty (30) days
     to match any legitimate offer to purchase said equipment
     received by Owner.[1]

     An exhibit to the ATC pay phone agreements includes a list

of service providers available to maintain the pay phones should

petitioner not want to service the pay phones himself.

Petitioner had the option to enter into service agreements if he

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

pay phones.   Petitioner entered into service agreements with

Alpha Telcom (Alpha Telcom service agreements) for the servicing

of his pay phones.   Petitioner never changed service providers,

nor did he contact any other service provider to inquire about

service options for his pay phones.

     Under the terms of the Alpha Telcom service agreements,

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


     1
        There are minor variations in the terms of the buyback
elections, none of which are material.
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pay petitioner 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,

petitioner would receive 100 percent of the revenue.

Notwithstanding the terms of the Alpha Telcom service agreements,

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

pay phone, regardless of how little income the pay phones

produced.   Additionally, under the Alpha Telcom service

agreements, 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.

     ATC sent petitioner an undated Payphone Purchase &

Installation Confirmation document to confirm the order and

installation of the pay phone for the August 18, 2000, contract.

Petitioner received letters (dated November 7, 2000, and January

10, 2001) to confirm the order and installation of the pay phones

for the November 7, 2000, and January 5, 2001, contracts.

Petitioner was not able to select the pay phones that would be
                                - 6 -

randomly assigned to him.    Petitioner does not know where all of

the pay phones assigned to him were located.

     Sometime around August 2000, an ATC/Alpha Telcom sales

representative gave petitioner 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 agreements state that “Phones

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

confirmation letters also state that “These phones qualify under

the 1990 Americans with Disabilities Act, as amended”.

Petitioner was not provided with a list of the modifications that
                                 - 7 -

were made to the pay phones that were assigned to him, and he did

not know the cost of these modifications.

     Petitioner claimed a $4,875 tax credit for 2000, a $4,875

tax credit for 2001, and a $2,375 tax credit for 2002 on Forms

8826, Disabled Access Credit, with respect to the pay phones,

that were attached to his Federal income tax returns for the

years in issue.

     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 July 26, 2002, petitioner filed a proof of claim in the

bankruptcy court in the amount of $90,000, representing the

$90,000 that he had invested.2    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



     2
        Petitioner’s $90,000 payment represented the amount he
paid for a total of 18 pay phones. Petitioner purchased 7 pay
phones from ATC, in addition to the 11 pay phones petitioner had
previously purchased from ATC. Petitioner did not claim a sec.
44 credit for the additional 7 pay phones. Those pay phones are
not before the Court.
                               - 8 -

was a pending receivership 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 disabled access credits petitioner

claimed because “no business reason, to comply with the Americans

With Disabilities Act of 1990, has been given and verified to

claim the credit”.

                            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.

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

burden of proof shifts from the taxpayer to the Commissioner if
                                  - 9 -

the taxpayer produces credible evidence with respect to any

factual issue relevant to ascertaining the taxpayer’s tax

liability.     Sec. 7491(a)(1).

        Petitioner has not argued that he has 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.     ADA Tax Credit

      In Arevalo v. Commissioner, 124 T.C. at 254, we discussed in

some detail the interplay of the general business credit under

section 38 and the disabled access credit under section 44(a).

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 cited cases 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
                              - 10 -

     in accord with their ordinary and natural meaning.
     See, e.g., Smith v. United States, 508 U.S. 223, 228
     (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

petitioner did not own, lease, or operate anything as a result of

his investments in the pay phones and was never under an

obligation to comply with the requirements of ADA title III

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

did in Arevalo, that petitioner was under no obligation to comply

with ADA title IV during the years in issue, since petitioner was

not actively engaged in the provision of services to anyone as a

result of his investments in the pay phones.    See id. at 257 (and

cases cited thereat).   Respondent is sustained on this issue.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,


                                      Decision will be entered for

                                 respondent.
