                  T.C. Summary Opinion 2007-149



                     UNITED STATES TAX COURT



                EDWARD ATLEE HOWES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 262-04S.               Filed August 29, 2007.


     Edward Atlee Howes, pro se.

     Julia L. Wahl, for respondent.



     ARMEN, 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.1   Pursuant to section

7463(b), the decision to be entered is not reviewable by any



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

other court, and this opinion shall not be treated as precedent

for any other case.

      Respondent determined deficiencies in petitioner’s Federal

income taxes for 1999, 2000, and 2001 of $5,154, $3,356, and

$3,252, respectively.     The deficiencies stem generally from the

disallowance of depreciation deductions under section 167 and the

disallowance of disabled access credits under section 44.    On

June 21, 2007, after the parties had filed a comprehensive

stipulation of facts, this Court issued an Order to Show Cause

why respondent’s determination as to the denial of the

depreciation deductions and the disabled access credits should

not be sustained.   For the reasons discussed below, we now make

that Order absolute.

                              Background

A.   Procedural History

      This case, commenced in January 2004, has been continued for

trial on three separate occasions because of the pendency of

related litigation (sometimes referred to herein as the Alpha

Telcom cases).   The related litigation has now been concluded,

and the decisions entered in those cases have become final.    In

every instance, the Court has sustained the Commissioner’s

deficiency determination, and in each of the cases in which the

taxpayer appealed, a U.S. Court of Appeals has affirmed the

decision of this Court.    See Arevalo v. Commissioner, 124 T.C.
                               - 3 -

244 (2005), affd. 469 F.3d 436 (5th Cir. 2006); Crooks v.

Commissioner, 453 F.3d 653 (6th Cir. 2006).   No court has held to

the contrary.   In short, this Court and the Courts of Appeals

have consistently held that a taxpayer’s investment in an

arrangement involving pay telephones marketed by Alpha Telcom,

Inc. (Alpha Telcom) and its wholly owned subsidiary American

Telecommunications Co., Inc. (ATC) did not support either (1) a

deduction for depreciation, because the taxpayer did not have the

requisite benefits and burdens of ownership to support a

depreciable interest in the pay telephones, or (2) a disabled

access credit under section 44, because such investment was not

an eligible access expenditure.

     On September 20, 2004, the parties in the instant case filed

a comprehensive Stipulation Of Facts consisting of 33 numbered

paragraphs and 31 exhibits.   The Stipulation Of Facts and

accompanying exhibits provide an evidentiary record for this

case, discussed more fully below, that does not materially differ

from the facts presented in the Alpha Telcom cases already

decided by this Court and the Courts of Appeal.   Therefore, on

June 21, 2007, we ordered the parties to show cause in writing

why the Court should not enter a decision sustaining respondent’s

determination as to (1) the denial of deductions for depreciation

on the telephones, and (2) the denial of disabled access credits
                               - 4 -

under section 44, both pursuant to Arevalo v. Commissioner,

supra, and other relevant case law.

      Petitioner submitted a response to our Order completely

devoid of any factual analysis; it contained only irrelevant

statements and naked, unsupported assertions that his case is

somehow different from all of the other Alpha Telcom cases.     Such

a response is insufficient to persuade us that the Order should

not be made absolute.   See Rule 121(d) (requiring that a party

must present specific facts showing that there is a genuine issue

for trial in the summary judgment context).

B.   The Stipulated Facts

      The following facts have been stipulated, and they are so

found; we incorporate by reference the parties’ stipulation of

facts and accompanying exhibits.

      At the time the petition was filed, Edward Atlee Howes

(petitioner) resided in Naples, Florida.

      On March 2, 1999, petitioner entered into a contract with

ATC, a wholly owned subsidiary of Alpha Telcom, entitled

“Telephone Equipment Purchase Agreement” (ATC pay telephone

agreement).2   Under the terms of the ATC pay telephone agreement,

petitioner paid $10,000 to ATC, and ATC provided petitioner with




      2
        In the exhibits attached to the Stipulation Of Facts, ATC
sometimes refers to American Telecommunications, Inc., and
sometimes to Alpha Telcom.
                               - 5 -

legal title to two pay telephones.     The ATC pay telephone

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 [sic] with Disabilities Act. (ADA)


     On the same day, petitioner entered into a Telephone

Services Agreement (Alpha Telcom service agreement) under which

petitioner agreed that Alpha Telcom would manage the two pay

telephones.   Because petitioner did not feel able to maintain the

telephones himself, he elected “Level IIII” [sic] service.     This

election meant that Alpha Telcom agreed to service and maintain

the pay telephones for an initial term of 3 years in exchange for

70 percent of the pay telephones’ monthly adjusted gross revenue.

In the event that a pay telephone’s adjusted gross revenue was

less than $58.34 for the month, Alpha Telcom would waive or

reduce the 70-percent fee and pay petitioner at least $58.34, so

long as the equipment generated at least that amount.     In the

event that a pay telephone’s adjusted gross revenue was less than
                               - 6 -

$58.34 for the month, petitioner would receive 100 percent of the

revenue.   Notwithstanding this formula, Alpha Telcom made it a

practice to pay $58.34 per telephone, regardless of the income

actually produced.

     Additionally, Alpha Telcom agreed to be bound by the “Buy

Back Election” to the Alpha Telcom service agreement.   The “Buy

Back Election” 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
     equipment delivery date and the exercise date for the buy
     back election, the sale 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.


     Under the Alpha Telcom service agreement, Alpha Telcom

negotiated the site agreement with the owner or leaseholder of

the premises where the pay telephones were to be installed.3

Alpha Telcom installed the telephones, paid the insurance

premiums on them, collected and accounted for the revenues

generated by the telephones, paid vendor commissions and fees,




     3
        At some point, ATC sent petitioner an undated letter,
informing him that one of the telephones assigned to him and
located at a business called Art’s Cafe had been replaced with
one located at a Black Angus restaurant. Petitioner had no
affiliation with either Art’s Café or Black Angus. Petitioner
did not initiate this change, and it was made without his prior
knowledge or assent.
                               - 7 -

obtained all licenses needed to operate the telephones, and took

all actions necessary to keep the telephones in working order.

     On December 29, 2000, petitioner entered into a second

“Telephone Equipment Purchase Agreement” contract with ATC,

ostensibly purchasing two more telephones for $5,000 each.4     He

again signed a services agreement and selected the “Level 4”

service.   Again, Alpha Telcom was responsible for all

maintenance, and petitioner was to receive $58.34 per month, per

telephone.   Petitioner was later informed that these two pay

telephones were placed at an amateur baseball field in West

Warwick, Rhode Island.   As was true with all of the pay

telephones assigned to petitioner under this scheme, Alpha Telcom

negotiated for the placement of the telephones, and petitioner

was not involved in any way with those negotiations.

     Alpha Telcom modified the pay telephones to be accessible to

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

telephones 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

telephones were installed.   Alpha Telcom represented to investors



     4
        The Telephone Equipment Bill of Sale and Purchase
Agreement was left blank; it did not actually identify in any way
the telephones that would be assigned to petitioner.
Additionally, though the Buy Back Election was slightly modified
from its earlier form, it still provided for a repurchase price
of $5,000 per telephone.
                                - 8 -

that the modifications made to the pay telephones complied with

the requirements of the Americans with Disabilities Act of 1990

(ADA), Pub. L. 101-336, 104 Stat. 327.5   Petitioner was not

provided with a list of the modifications that were made to the

pay telephones assigned to him, and he did not know the cost of

these modifications.

     Petitioner received monthly payments of $58.34 per telephone

in 1999 and 2000 from Alpha Telcom.6

     Alpha Telcom grew rapidly through its pay telephone 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 February 25, 2002, petitioner filed a

proof of claim with the bankruptcy court.7


     5
        Aside from Alpha Telcom’s own representations, petitioner
received a flyer from an entity named Tax Audit Protection, Inc.
The flyer provided information about Alpha Telcom pay telephones.
It stated that owners of Alpha Telcom pay telephones qualified
for tax credits for compliance with the ADA. The flyer
identified a person named George Mariscal as the president of the
company.
     6
        The payments in 1999 were prorated according to when
Alpha Telcom installed the telephones.
     7
        The bankruptcy matter was dismissed on Sept. 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
                                                   (continued...)
                                 - 9 -

      The Securities and Exchange Commission brought a civil suit

against Alpha Telcom in 2001, alleging that the pay telephone

scheme was a security and that the company was in violation of

Federal securities law; the decision was affirmed by the U.S.

Court of Appeals for the Ninth Circuit in 2003.     See SEC v.

Rubera, 350 F.3d 1084, 1087 (9th Cir. 2003).

      In the notice of deficiency that gave rise to the instant

case, respondent disallowed the depreciation deductions

petitioner claimed because petitioner did not have a depreciable

interest in the telephones.     Respondent also disallowed the

disabled access credits petitioner claimed because petitioner had

not demonstrated that he was in a trade or business, that the

expenses were reasonable, or that the expenses were enabling a

business to comply with the ADA.

                               Discussion

A.   Depreciation Deductions

      Section 167(a) allows as a depreciation deduction a

reasonable allowance for the “exhaustion, wear and tear” of

property (1) used in a trade or business or (2) held for the

production of income.   Sec. 167(a)(1) and (2).




      7
      (...continued)
bankruptcy matter so that proceedings could continue in Federal
District Court, where there was a pending receivership involving
debtors.
                               - 10 -

     Depreciation deductions are based on an investment in and

actual ownership of property rather than the possession of bare

legal title.    See Arevalo v. Commissioner, 124 T.C. at 251; Grant

Creek Water Works, Ltd. v. Commissioner, 91 T.C. 322, 326 (1988);

Narver v. Commissioner, 75 T.C. 53, 98 (1980), affd. 670 F.2d 855

(9th Cir. 1982).   “The Supreme Court has repeatedly stressed

that, in examining transactions for the purpose of determining

their tax consequences, substance governs over form.”     Arevalo v.

Commissioner, 469 F.3d at 439; see also Frank Lyon Co. v. United

States, 435 U.S. 561, 572-573 (1978); Grodt & McKay Realty, Inc.

v. Commissioner, 77 T.C. 1221, 1236 (1981).

     If the benefits and burdens reflecting ownership have not

passed from “seller” to “purchaser”, we disregard the transfer of

formal legal title when determining ownership of an asset for tax

purposes.   See Arevalo v. Commissioner, 469 F.3d at 439.    In

other words, when a taxpayer never actually owns the property in

question, the taxpayer is not allowed to claim a deduction for

depreciation.    See Arevalo v. Commissioner, 124 T.C. at 251;

Grodt & McKay Realty, Inc. v. Commissioner, supra at 1236-1238;

see also Schwartz v. Commissioner, T.C. Memo. 1994-320, affd.

without published opinion 80 F.3d 558 (D.C. Cir. 1996).     Whether

the benefits and burdens of ownership with respect to property

have passed to the taxpayer is a question of fact that must be

ascertained from the intention of the parties as established by

the written agreements read in light of the attending facts and
                               - 11 -

circumstances.   See Arevalo v. Commissioner, 124 T.C. at 251-252;

Grodt & McKay Realty, Inc. v. Commissioner, supra at 1237.

     The denial of depreciation deductions in the other Alpha

Telcom cases has routinely been supported by the examination of

eight factors:   (1) Whether legal title passes; (2) the manner in

which the parties treat the transaction; (3) whether the

purchaser acquired any equity in the property; (4) whether the

purchaser has any control over the property, and, if so, the

extent of such control; (5) whether the purchaser bears the risk

of loss or damage to the property; and (6) whether the purchaser

will receive any benefit from the operation and disposition of

the property.    See, e.g., Arevalo v. Commissioner, 469 F.3d at

439-440; Crooks v. Commissioner, 453 F.3d at 656.     Just as we

concluded in Arevalo and Crooks, we conclude here that the

factors clearly work against petitioner and no depreciation

deduction is warranted.

     The stipulation of facts and accompanying documents reveal

that here, as in the related litigation, Alpha Telcom was

responsible for the installation, location selection, site

negotiation, and maintenance of the pay telephones.    Alpha Telcom

bore the risk of loss if the telephones did not generate

sufficient revenue because petitioner was guaranteed to be paid

at least $58.34 per month per pay telephone, regardless of the

revenues actually generated, and it was Alpha Telcom who received

the majority of any profit from the telephones.   Further limiting
                                 - 12 -

petitioner’s risk of loss was the combination of the ATC pay

telephone agreement and the Alpha Telcom service agreement,

allowing petitioner to sell legal title to the telephones back to

ATC for a fixed formula price.

     Because petitioner never owned a depreciable interest in the

pay telephones, he is not entitled to claim depreciation

deductions under section 167 with respect to them.      See Crooks v.

Commissioner, supra; Arevalo v. Commissioner, supra.

B.   ADA Tax Credits

      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 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).

      In order to claim the disabled access credit, a taxpayer

must demonstrate:      (1) the taxpayer is an “eligible small

business” for the year in which the credit is claimed and, (2)

the taxpayer has made “eligible access expenditures” during that

year.   If the taxpayer cannot fulfill both of these requirements,

the taxpayer is not eligible to claim the credit for that year.

      For purposes of section 44, the term “eligible small

business” is defined as any person who:      (1) had gross receipts

of no more than $1 million for the preceding year or not more

than 30 full-time employees during the preceding year and (2)
                                 - 13 -

elects the application of section 44 for the year.     Sec. 44(b).

The term “eligible access expenditure” is defined as an amount

paid or incurred by an eligible small business for the purpose of

enabling the eligible small business to comply with the

applicable requirements under the ADA.     Sec. 44(c)(1).   Such

expenditures include amounts paid or incurred (1) 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; (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).   However, eligible access expenditures 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).

     In order for an expenditure to qualify as an eligible access

expenditure within the meaning given that term by section 44(c),
                              - 14 -

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

comply with the applicable requirements under the ADA.    See

Arevalo v. Commissioner, 124 T.C. at 255; Fan v. Commissioner,

117 T.C. 32, 38-39 (2001).   Consequently, a person who does not

have an obligation to become compliant with the requirements set

forth in the ADA could never make an eligible access expenditure.

Petitioner, like the taxpayers in the other Alpha Telcom cases,

had no obligation to become compliant with the ADA.

     As relevant here, the requirements set forth in the ADA

apply only 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) (2000); see also 47 U.S.C. sec. 225(c) (2000).

Petitioner did not own, lease, lease to, or operate a public

accommodation during the taxable years at issue, nor was he a

“common carrier” of telephone voice transmission services during

those years.   Accordingly, petitioner was under no obligation to

become compliant with the requirements set forth in the ADA.    See

42 U.S.C. sec. 12182(b)(2)(A)(ii) and (iii); 47 U.S.C. sec.

153(10); 47 U.S.C. sec. 225(a)(1) and (c).   Because petitioner

did not own the pay telephones in which he invested and had no

involvement in their operation, petitioner was not actively

engaged in the provision of services to anyone as a result of his

investment in the pay telephones.   Therefore, petitioner’s

investments in the telephones were not eligible access
                             - 15 -

expenditures, and petitioner is not entitled to claim the

disabled access credit under section 44 for his investments in

the telephones.

     To reflect our disposition of the disputed issues and to

make our Order to Show Cause absolute, as well as for such other

proceedings as may be necessary,



                                        An appropriate order

                                   will be issued.
