                  T.C. Memo. 2006-30



                UNITED STATES TAX COURT



    RALPH E. AND MILDRED E. GALYEN, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 5092-04.               Filed February 22, 2006.


     The Telecommunication Relay Service (TRS) enables a
hearing-impaired individual to communicate with a hearing
individual over the telephone through the use of a relay
operator. Ps subscribed to the AdaCom program which
provided an alternative to the TRS through the use of a
computer rather than a relay operator. On their 2000, 2001,
and 2002 Federal income tax returns, Ps claimed a disabled
access credit. See sec. 44, I.R.C. Ps also claimed a sec.
162, I.R.C., trade or business expense deduction. R
disallowed the credit and deduction.

     Held: Because the AdaCom program was not acquired by
Ps in order for them to comply with the applicable
requirements of the Americans with Disabilities Act of 1990,
Pub. L. 101-336, 104 Stat. 327, the AdaCom program is not an
“eligible access expenditure” for purposes of sec. 44(c),
I.R.C. Taye-Channell v. Commissioner, T.C. Memo. 2006-8;
Svoboda v. Commissioner, T.C. Memo. 2006-1.
                                - 2 -

     Held, further: Ps are not entitled to claim a deduction
under sec. 162, I.R.C., with respect to the AdaCom program.


     Scott M. Estill and Stephanie F. Long, for petitioners.

     Richard D. D’Estrada, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined deficiencies of

$3,323, $3,556, and $3,126 in petitioners’ Federal income tax for

2000, 2001, and 2002, respectively.

     The issues for decision are:

     (1) Whether petitioners are entitled to claim a tax credit

pursuant to sections 381 and 44 for their subscription to the

AdaCom program (program);

     (2) whether petitioners are entitled to claim a trade or

business expense deduction under section 162 with respect to the

program; and

     (3) if petitioners are entitled to a credit and/or deduction

for their investment in the program, the proper valuation of the

program.




     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.
                                 - 3 -

                        FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.     At the time they filed

the petition, petitioners resided in Colorado Springs, Colorado.

     During the years at issue, petitioners subscribed to the

program, which was sold, sponsored, and administered by AdaCon

Advantage Co., Inc. (AdaCom2).    AdaCom is a Colorado corporation

headquartered in Colorado Springs, Colorado.     AdaCom developed a

program to enable deaf or hearing-impaired individuals to

communicate with hearing individuals and/or businesses.

Current Technology

     A text telephone (TTY) is an electronic device that allows a

person to type conversations over telephone lines.     TTYs do not

amplify sound or convert speech to text.

     A TTY user can use the Telecommunications Relay Services

(TRS) to call a person using a standard telephone and vice versa.

TRS is a system by which a hearing person and a deaf person can

communicate over the telephone.    TRS employs a relay operator who

receives the text from the deaf person.     The relay operator then

reads the text to the hearing party.     When a hearing party

provides a voice response, the relay operator types the text of



     2
        As the parties refer to the company as “AdaCom”, for
clarity we shall do the same.
                                - 4 -

the spoken message and transmits the text to the TTY.    TRS is

available in all States in the United States and, as required by

law, is provided free of charge by the local telephone company.

Normal charges do apply to long distance telephone calls.    TRS is

available 7 days per week, 24 hours per day.

AdaCom Technology

     During the years at issue, AdaCom maintained a computer with

TTY software to allow a hearing-impaired person to use a TTY to

call the AdaCom computer.    The computer then sent the text to a

program subscriber who was required to have a computer with a

standard modem.

     A program subscriber could also use his computer equipped

with a modem to contact the AdaCom computer to initiate calls to

a TTY user.   The AdaCom computer was available 7 days per week,

24 hours per day.

     If a program subscriber was unavailable when an attempt was

made by the AdaCom computer to contact him, a message was

transmitted that could be retrieved at a later time.    Once a

communication was completed, the text of the communication was

deleted from the AdaCom computer.

     Program subscribers were listed in the AdaCom yellow pages

directory.    The AdaCom yellow pages directory listed only the

subscribers to the program and contained information on how to
                                - 5 -

communicate with the subscriber by listing a number code to

access the AdaCom computer.

     AdaCom also maintained a Web site directory of its program

subscribers.   AdaCom listed only program subscribers on the Web

site.

     In addition to receiving a listing in the AdaCom yellow

pages directory and on the Web site, the program entitled each

program subscriber to 5 hours of interpretative services of a

sign language interpreter.    Additionally, the program entitled

each program subscriber to 5 hours of audit defense, which

consisted of representation before the Internal Revenue Service

(IRS) to defend the claiming of the section 44 credit and

associated deductions of the program.    The audit defense services

did not cover representation at the IRS Appeals level or the cost

of litigation.

The Subscription

     The subscription price of the program was $10,250 annually.

The program subscribers were entitled to pay $2,500 in cash and

provide $7,750 in promotional services to be performed by the

program subscribers.   The promotional service programs, which

AdaCom valued at $7,750, were as follows:    (1) Program A–11

referrals by the program subscribers; (2) program B–7 referrals

by the program subscribers and the program subscribers were to

display and distribute AdaCom brochures; and (3) program C–4
                               - 6 -

referrals by the program subscribers, and the program subscribers

were to display and distribute AdaCom brochures and display an

AdaCom window decal.

     AdaCom advised program subscribers to include $7,750 in

income, deduct $5,250 as an ordinary and necessary business

expense pursuant to section 162, and claim a credit equal to

$5,000 pursuant to sections 38 and 44.   The deduction of $5,250

comprised the $2,500 cash paid plus the excess of the promotional

services income over the claimed credit amount--$7,750 minus

$5,000, which equals $2,750.   AdaCom issued a Form 1099-MISC,

Miscellaneous Income, in the amount of $7,750 to each program

subscriber.

     None of the people referred by the program subscribers were

required to subscribe to the program in order for the referring

program subscriber to obtain credit towards the purchase price of

the program.

Petitioners’ Tax Return

     During the taxable years 2000, 2001, and 2002, petitioner

Mildred E. Galyen was a retired teacher, and petitioner Ralph E.

Galyen was employed as an insurance salesman for the Ralph Galyen

Agency, Inc. (Galyen Agency), a Colorado subchapter S

corporation.   Petitioner Ralph E. Galyen was sole shareholder and

president of the Galyen Agency during this period.   The Galyen

Agency provided insurance services to the general public.   During
                                 - 7 -

the years at issue, the Galyen Agency had less than $1 million in

annual sales and fewer than 30 employees.   The Galyen Agency

subscribed to the program for the taxable years 2000, 2001, and

2002.   On the subscription for each year, the Galyen Agency chose

promotional service program C.    The subscription contracts do not

include the names of the referrals made by the Galyen Agency.

The Galyen Agency paid AdaCom $2,500 and was credited with $7,750

in promotional services.

     The gross income of the Galyen Agency for the taxable years

2000, 2001, and 2002 was $272,052, $210,847, and $21,803,

respectively.   These amounts included $7,750 each year as

bartering income for promotional services from AdaCom.

     On the basis of the subscriptions to the program, the Galyen

Agency claimed a $5,250 business expense deduction and a $5,000

section 44 credit on Form 1120S, U.S. Income Tax Return for an S

Corporation, for each of the years 2000, 2001, and 2002.

     On their Form 1040, U.S. Individual Income Tax Return, for

taxable years 2000, 2001, and 2002, petitioners reported Schedule

K-1, Shareholder’s Share of Income, Credits, Deductions, etc.,

distributive shares of $83,324, $39,921, and $8,935 of nonpassive

income from the Galyen Agency, respectively.

     Respondent determined deficiencies in petitioners’ Federal

income tax for 2000, 2001, and 2002 in the amounts of $3,323,

$3,556, and $3,126, respectively, after decreasing petitioners’
                               - 8 -

income by the amount of bartering services income reported and

disallowing a section 44 credit and a section 162 deduction.

                              OPINION

Burden of Proof

     As a general rule, the notice of deficiency is entitled to a

presumption of correctness, and the taxpayer bears the burden of

proving the Commissioner’s deficiency determinations incorrect.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Section 7491(a), however, provides that if a taxpayer introduces

credible evidence and meets certain other prerequisites, the

Commissioner shall bear the burden of proof with respect to

factual issues relating to the liability of the taxpayer for a

tax imposed under subtitle A or B of the Internal Revenue Code

(Code).   For the burden to shift, however, the taxpayer must

comply with the substantiation and recordkeeping requirements as

provided in the Code and cooperate with the Commissioner.    See

sec. 7491(a)(2).

     Although petitioners claimed that section 7491(a) applies,

petitioners failed to introduce sufficient evidence to shift the

burden to respondent.   Nonetheless, our findings in this case are

based on a preponderance of the evidence.   See Arevalo v.

Commissioner, 124 T.C. 244 (2005).
                                 - 9 -

ADA Tax Credit

     Section 44(a) is included in calculating the general

business credit pursuant to section 38.     Sec. 38(a) and (b).

Section 44(a) provides a disabled access credit for an “eligible

small business”.    The amount of this 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).   Therefore, in order to claim the

disabled access credit, a taxpayer must demonstrate that (1) the

taxpayer is an “eligible small business” for the year in which

the credit is claimed, and (2) the taxpayer has made an “eligible

access expenditure” during that year.     If the taxpayer cannot

fulfill both of these requirements, the taxpayer is not eligible

to claim the section 44 credit for that year.

     “Eligible small business” is defined as any person that had

gross receipts of not more than $1 million for the preceding

taxable year or not more than 30 employees during the preceding

year and elects the application of section 44 for the year.       Sec.

44(b).

     “Eligible access expenditure” is defined as an amount paid

or incurred by eligible small businesses for the purpose of

complying with the Americans with Disabilities Act of 1990 (ADA),

Pub. L. 101-336, 104 Stat. 327.     Sec. 44(c)(1).   Such

expenditures include amounts paid or incurred (1) for the purpose
                                 - 10 -

of 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 disabilities; or (4) to provide

other similar services, modifications, materials, or equipment.

See sec. 44(c)(2).   Eligible access expenditures, however, do not

include expenditures that are unnecessary to accomplish such

purposes.   See sec. 44(c)(3).    Additionally, eligible access

expenditures do not include amounts that are paid or incurred for

the purpose of removing architectural, communication, physical,

or transportation barriers that prevent a business from being

accessible to, or usable by, individuals with disabilities with

respect to any facility first placed in service after November 5,

1990.   See sec. 44(c)(4).

     Petitioners contend that they are eligible to claim the

disabled access credit under section 44(a) because (1) they had

an eligible small business, and (2) their investment in the

program was an eligible access expenditure.     Respondent contends,

among other things, that a subscription to the program is not

necessary to comply with the ADA and thus is not an eligible

access expenditure pursuant to section 44(c).
                               - 11 -

       In order for an expenditure to qualify as an eligible access

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

the expenditure must have been made to enable an eligible small

business to comply with the applicable requirements under the

ADA.    Arevalo v. Commissioner, supra; Fan v. Commissioner, 117

T.C. 32 (2001).

       Title IV of the ADA requires “Each common carrier providing

telephone voice transmission services” to provide “throughout the

area in which it offers service, telecommunications relay

services”.    47 U.S.C. sec. 225(c) (2000).   “Telecommunications

relay services” is defined as:

       telephone transmission services that provide the ability for
       an individual who has a hearing impairment or speech
       impairment to engage in communication by wire or radio with
       a hearing individual in a manner that is functionally
       equivalent to the ability of an individual who does not have
       a hearing impairment or speech impairment to communicate
       using voice communication services by wire or radio. Such
       term includes services that enable two-way communication
       between an individual who uses a TDD or other nonvoice
       terminal device and an individual who does not use such a
       device. [47 U.S.C. sec. 225(a)(3).]

       TTY supersedes the term “TDD”.   47 C.F.R. sec. 64.601(15)

(2004).    Congress further directed the Federal Communications

Commission (FCC) to enforce these provisions and to:

       (A) Establish functional requirements, guidelines, and

operations procedures for TRS;

       (B) establish minimum standards that shall be met;

       (C) require that TRS operate every day for 24 hours per day;
                                - 12 -

       (D) require that users of TRS pay rates no greater than the

rates paid for functionally equivalent voice communication

services with respect to such factors as the duration of the

call, the time of day, and the distance from point of origin to

point of termination;

       (E) prohibit relay operators from failing to fulfill the

obligations of common carriers by refusing calls or limiting the

length of calls that use TRS;

       (F) prohibit relay operators from disclosing the content of

any relayed conversation and from keeping records of the content

of any such conversation beyond the duration of the call; and

       (G) prohibit relay operators from intentionally altering a

relayed conversation.

47 U.S.C. sec. 225 (d) and (e).

       As mentioned supra, all States utilize TRS and follow the

aforementioned requirements.    Since Congress mandated the

adoption of TRS by common carriers, any place with a telephone is

currently in compliance with the ADA.    Petitioners argue that the

program is an alternative to TRS and provides improvements to

TRS.

       However, petitioners’ subscription to the program did not

enable them to comply with the ADA--they already were in

compliance with the ADA through the use of TRS.    Taye-Channell v.

Commissioner, T.C. Memo. 2006-8; Svoboda v. Commissioner, T.C.
                                - 13 -

Memo. 2006-1.   Therefore, the cost of the program is not an

eligible access expenditure within the meaning of section 44(c),

and, consequently, they do not qualify for the disabled access

credit.   Respondent’s determination disallowing the credit is

sustained.

Section 162 Trade or Business Activity

     Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving that they are entitled to any

deductions claimed.    Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992).    Taxpayers are allowed a deduction for

ordinary and necessary expenses paid or incurred in carrying on a

trade or business.    Sec. 162(a).

     Whether an expenditure is ordinary and necessary is

generally a question of fact.    Commissioner v. Heininger, 320

U.S. 467, 475 (1943).    Generally, for an expenditure to be an

ordinary and necessary business expense the taxpayer must show a

bona fide business purpose for the expenditure; there must be a

proximate relationship between the expenditure and the business

of the taxpayer.     Challenge Manufacturing Co. v. Commissioner, 37

T.C. 650 (1962); Henry v. Commissioner, 36 T.C. 879 (1961).

     To be "necessary" within the meaning of section 162, an

expense need be "appropriate and helpful" to the taxpayer's

business.    Welch v. Helvering, 290 U.S. 111, 113 (1933).   The

requirement that an expense be "ordinary" connotes that "the
                             - 14 -

transaction which gives rise to it must be of common or frequent

occurrence in the type of business involved."     Deputy v. DuPont,

308 U.S. 488, 495 (1940) (citing Welch v. Helvering, supra at

114).

     Petitioners are not entitled to a section 162 deduction for

their investment in the program.   The program was not ordinary,

necessary, or helpful because petitioners were already in

compliance with the ADA through the use of TRS.    Additionally,

the program did not serve a valid business purpose.     Respondent’s

determination disallowing the deduction is sustained.

Conclusion

     We sustain respondent’s determination in the notice of

deficiency, decreasing petitioners’ income by the amount of

bartering services income reported and disallowing a section 44

credit and a section 162 deduction.    As we conclude that

petitioners are not entitled to a section 44 credit or a section

162 deduction, it is unnecessary for us to decide the proper

valuation of the program.

     To reflect the foregoing,

                                           Decision will be entered

                                      for respondent.
