                          T.C. Memo. 2009-98



                        UNITED STATES TAX COURT



MATTHEW P. LOVELAND AND KELLIE J. LOVELAND-MAGNUSON, Petitioners
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17980-05.                Filed May 14, 2009.



     Matthew P. Loveland and Kellie J. Loveland-Magnuson, pro

sese.

     Catherine S. Tyson, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:     Respondent determined deficiencies with

respect to petitioners’ Federal income tax of $13,310.40 for

2000, $3,750 for 2001, and $2,418 for 2002.       The issues for

decision are:    (1) Whether petitioners are entitled to certain

deductions relating to a pay phone activity reported on their
                              - 2 -

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

U.S. Individual Income Tax Return, for 2000 and 2001; (2) whether

petitioners are entitled to certain deductions reported on their

Schedule C relating to a Mary Kay cosmetics activity for 2002;

(3) whether certain income reported on petitioners’ 2000 and 2002

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

whether petitioners are entitled to carry forward and claim in

2002 a disability access credit under section 44.1

                        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.2

Background

     In 1999 Kellie J. Loveland-Magnuson (Ms. Magnuson) inherited

from her 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, Ms.

Magnuson requested information about the pay phones from Owen

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

preparer, and Mr. Snyder answered her questions about the pay




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
     2
      At the time of trial, petitioners were divorced, and
petitioner Kellie J. Loveland-Magnuson was remarried.
                               - 3 -

phones.   Ms. Magnuson decided to invest in additional Alpha

Telcom pay phones.

     On August 9, 1999, Ms. Magnuson entered into an agreement

with Alpha Telcom entitled “Telephone Equipment Purchase

Agreement” (purchase agreement) to purchase3 three additional pay

phones for $5,000 each, and she remitted a $15,000 payment to

Alpha Telcom.   Alpha Telcom or ATC, Inc., Alpha Telcom’s

subsidiary, was responsible for finding sites for and installing

the pay phones.   The purchase agreement included an attachment

entitled “Telephone Equipment List”; but when Ms. Manguson signed

the agreement, the attachment did not identify the pay phones she

was purchasing.   The purchase agreement stated that the “Phones

have approved installation under The [Americans] with

Disabilities Act.”

     On the same day, Ms. Magnuson entered into a 3-year

“Telephone Services Agreement” with Alpha Telcom (services

agreement).   Under the services 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, Alpha Telcom was entitled to 70

percent of the monthly adjusted gross revenue from the pay


     3
      We use the term “purchase” to mean that Ms. Magnuson
acquired an interest in the pay phones, but our use of the term
does not mean that Ms. Magnuson acquired a depreciable interest.
                                - 4 -

phones.   However, if the monthly adjusted gross revenue did not

exceed $58.34, Ms. Magnuson would be entitled to all of the

adjusted gross revenue and would owe Alpha Telcom no monthly fee.

In addition, Alpha Telcom promised to pay Ms. Magnuson a monthly

base amount of at least $58.34 per pay phone.

     The services agreement included an attachment entitled “Buy

Back Election” wherein Alpha Telcom agreed to buy back the pay

phones for a fixed price stated in the agreement.      After 36

months Alpha Telcom would buy back any pay phone for the full

purchase price.

     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.   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 pursuant to a 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.   Ms.

Magnuson did not take possession of the pay phones after the

bankruptcy, and she does not know what happened to them.
                               - 5 -

     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 Alpha Telcom 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 1999 petitioners filed a Form 1040 that included a Form

8826, Disabled Access Credit, reporting a current year disabled

access credit of $5,000.   The disabled access credit related to

Ms. Magnuson’s purchase of the three additional Alpha Telcom pay

phones in 1999.   However, petitioners did not use the credit to

offset any part of their 1999 Federal income tax liability.

     For 2000 petitioners filed a Form 1040 that included a

Schedule C relating to Ms. Magnuson’s Alpha Telcom pay phone

activity.   On the 2000 Schedule C petitioners reported gross

receipts or sales of $19,604, a $42,240 depreciation deduction,

and a $1,200 legal and professional fees deduction.   Petitioners

also attached to their 2000 return a Form 3800, General Business

Credit, showing a $2,290 general business credit carryforward of

the 1999 disabled access credit, but they did not use the credit
                                - 6 -

carryforward to offset any part of their 2000 Federal income tax

liability.

     For 2001 petitioners filed a Form 1040 that included a

Schedule C for the Alpha Telcom pay phone activity.   On the 2001

Schedule C petitioners reported no gross receipts, but they

claimed deductions for depreciation ($25,344) and legal and

professional services ($100).   Petitioners also attached to their

2001 Form 1040 a Form 3800 showing a $2,290 general business

credit carryforward of the 1999 disabled access credit, but they

did not use the credit carryforward to offset any part of their

2001 Federal income tax liability.

     For 2002 petitioners filed a Form 1040 that included a

Schedule C for a Mary Kay cosmetics activity.   On the 2002

Schedule C petitioners reported income of $214, cost of goods

sold of $800, and car and truck expenses of $18.   Petitioners

also attached a Form 3800 showing a $2,290 general business

credit carryforward of 1999 disabled access credit, which they

used to offset their 2002 Federal income tax liability.4

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

deficiency for 2000-02.   Respondent determined:   (1) Petitioners

were not entitled to depreciation deductions claimed on their

2000 and 2001 Schedules C; (2) petitioners were not entitled to a

     4
      The $2,710 balance of the $5,000 disabled access credit
reported in 1999 was carried back and used to offset petitioners’
1998 Federal income tax liability.
                                 - 7 -

deduction for legal and professional services claimed on their

2000 Schedule C; (3) petitioners were not entitled to cost of

goods sold and deductions for car and truck expenses claimed on

their 2002 Schedule C; (4) the gross receipts reported on

petitioners’ 2000 and 2002 Schedules C should be reported as

other income on their Forms 1040; and (5) petitioners were not

entitled to the disabled access credit carryforward claimed on

their 2002 Form 1040.5   Petitioners 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

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

469 F.3d 436 (5th Cir. 2006).6    It is well established that the

     5
      Respondent also made a computational adjustment to
petitioners’ child tax credits for 2000 and 2001.
     6
      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 respondent’s pretrial memorandum was not evidence in this
case. We did not indicate that we would refrain from relying on
                                                   (continued...)
                                 - 8 -

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

owning the pay phones required for them 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).


     6
      (...continued)
relevant cases in our opinion.
                               - 9 -

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

eight factors for determining whether a taxpayer, like Ms.

Magnuson, who invested in Alpha Telcom pay phones 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 to the property; and (8) which party receives the

profits from the operation and sale of the property.

     After analyzing the purchase and services agreements entered

into by Ms. Magnuson and the facts and circumstances of this

case, we conclude that the factors weigh against Ms. Magnuson.

Ms. Magnuson received only bare legal title to the pay phones.

She never took possession of the pay phones that she purchased,

nor could she identify the location of her pay phones.7   Alpha

Telcom controlled the location of and entered into site


     7
      At trial she testified only that she once saw a photograph
of one of her pay phones. She also testified that she saw some
pay phones in a mall in Sawgrass Mills, Florida, but that they
were not her pay phones. After Alpha Telcom filed for
bankruptcy, Ms. Magnuson did not take possession of the pay
phones, and she could not explain what happened to them.
                               - 10 -

agreements for the pay phones, collected monthly revenue, paid

vendor commissions and fees, and repaired and maintained the pay

phones.   Alpha Telcom was entitled to 70 percent of the monthly

profits from the pay phones as long as the monthly profits

exceeded $58.34.   The record does not show that Ms. Magnuson paid

any property taxes, insurance premiums, or license fees with

respect to the pay phones.    Moreover, Ms. Magnuson bore no risk

of loss for the pay phones.   Under the buyback provision, Alpha

Telcom agreed to repurchase any pay phone, regardless of

condition or value, for a fixed price stated in the services

agreement.

      After a review of the facts and circumstances, we conclude

that Ms. Magnuson never received the benefits and burdens of

ownership with respect to the pay phones.   Therefore, we sustain

respondent’s determination disallowing petitioners’ 2000 and 2001

depreciation deductions.8

II.   Legal and Professional Services

      In addition to the depreciation deductions, petitioners also

claimed a deduction for legal and professional services on their


      8
      Petitioners claimed a $25,344 depreciation deduction on
their 2001 Schedule C, but respondent disallowed only $25,000 of
the deduction in the notice of deficiency. Although respondent’s
decision to allow $344 of the depreciation deduction appears to
be inconsistent with his position that petitioners were not
engaged in a trade or business during 2001, we address
petitioners’ depreciation deduction only to the extent disallowed
by respondent.
                               - 11 -

2000 Schedule C relating to the pay phone activity.     In the

notice of deficiency, respondent disallowed that deduction on the

grounds that it was not an ordinary and necessary business

expense and that no deduction is allowed for any personal,

family, or living expenses.9

     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).

     As we have already stated, Ms. Magnuson never received the

benefits and burdens of ownership with respect to the pay phones

that would entitle her to the incidents of taxation attributable

to their ownership.   Because Ms. Magnuson never had more than


     9
      In the notice of deficiency respondent also disallowed the
cost of goods sold and car and truck expenses reported on
petitioners’ 2002 Schedule C relating to the Mary Kay cosmetics
activity. In addition respondent determined that the $214
business income reported on the Schedule C for the Mary Kay
cosmetics activity should be reclassified as other income on
petitioners’ Form 1040. Petitioners did not introduce any
evidence at trial or make any arguments in their posttrial briefs
regarding the 2002 Mary Kay cosmetics activity. Consequently, we
conclude that petitioners have conceded respondent’s
determination with respect to the Mary Kay cosmetics activity in
2002.
                               - 12 -

bare legal title and did not conduct any business involving the

pay phones, we conclude that she was not in the trade or business

of owning and operating pay phones.      Consequently, petitioners

are not entitled to claim deductions under section 162(a) with

respect to the pay phone activity.      We sustain respondent’s

determination disallowing the deduction for legal and

professional services claimed on petitioners’ 2000 Schedule C.

III. Gross Receipts From the Pay Phone Activity

      Respondent argues that the $19,604 of gross receipts or

sales from the pay phone activity reported on petitioners’ 2000

Schedule C should be reclassified as other income on petitioners’

Form 1040 because petitioners were not engaged in a trade or

business.   We agree.   As we have already stated above, Ms.

Magnuson’s pay phone activity was not a trade or business.        Thus,

the gross receipts from the pay phone activity should properly be

classified as miscellaneous items of gross income and should be

reported as other income on petitioners’ Form 1040.      See sec.

1.61-14, Income Tax Regs.10

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

      10
      Respondent determined accordingly that the gross receipts
or sales reported on the 2000 Schedule C should be decreased by
$19,604, and we so find.
                                 - 13 -

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

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

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

access expenditures” means amounts paid or incurred to enable an

eligible small business to comply with the requirements under the

ADA.11    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


     11
      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 -

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.   Ms. Magnuson did not own, lease,

lease to, or operate a public accommodation during 1999, nor was

she a common carrier of telephone voice transmission services

during 1999.12   Therefore, Ms. Magnuson was not obligated to

comply with the ADA requirements and did not make any eligible

access expenditures in 1999.13    We conclude that petitioners are

not entitled to claim the disabled access credit carryforward in

2002 for the purchase of the pay phones in 1999.

     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.

     12
      Although the taxable year 1999 is not before us, we may
nevertheless consider facts with relation to the taxes for other
years as may be necessary to redetermine the correct amount of
the deficiency for the years at issue. See sec. 6214(b).
     13
      Petitioners cite Hubbard v. Commissioner, T.C. Memo. 2003-
245, in support of their argument that they are entitled to a
disabled access credit for the pay phones. 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 the ADA.
                        - 15 -

To reflect the foregoing,


                                   Decision will be entered

                             for   respondent.
