DocketNumber: No. 13272-04
Citation Numbers: 124 T.C. 244, 2005 U.S. Tax Ct. LEXIS 16, 124 T.C. No. 15
Judges: "Cohen, Mary Ann"
Filed Date: 5/18/2005
Status: Precedential
Modified Date: 10/19/2024
*16 P entered into a contract with American Telecommunications
Co., Inc. (ATC). Under the terms of the contract, P paid $ 10,000
to ATC and ATC provided P with legal title to two pay telephones
(pay phones). P also entered into a service agreement with Alpha
Telcom, Inc. (Alpha Telcom), the parent company of ATC, under
which Alpha Telcom serviced the pay phones and retained most of
the profits.
1. Held: Because P did not have the benefits and
burdens of ownership with respect to the pay phones, P did not
have a depreciable interest in the pay phones. Therefore, P is
not entitled to claim a deduction for depreciation with respect
to the pay phones in 2001.
2. Held, further, because P's pay phone
activities did not obligate him to comply with the requirements
set forth in either title III or title IV of the
P's $ 10,000 investment in the pay phones is not an eligible
access expenditure. Therefore, P is not entitled to claim the
disabled access credit*17 under
in the pay phones in 2001.
*245 OPINION
COHEN, Judge: Respondent determined a deficiency of $ 1,999 in petitioner's Federal income tax for 2001 that was attributable to respondent's disallowance of depreciation deducti ons and tax credits claimed by petitioner with respect to two public pay telephones (pay phones). In an amendment to answer, respondent asserted an increased deficiency of $ 30,247 and a penalty of $ 6,049 under
(1) Whether petitioner is entitled to claim a deduction for depreciation under
(2) whether petitioner is entitled to claim a tax credit under
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules*18 of Practice and Procedure.
Background
This case was submitted on a stipulation of facts and supplemental stipulation of facts, and the stipulated facts are incorporated in our findings by this reference. Petitioner resided in Austin, Texas, at the time that he filed his petition.
Petitioner's Investment in the Pay Phones
On June 7, 2001, petitioner entered into a contract with American Telecommunications Co., Inc. (ATC), a wholly owned subsidiary of Alpha Telcom, Inc. (Alpha Telcom), entitled "Telephone Equipment Purchase Agreement" (ATC pay phone agreement). Under the terms of the ATC pay phone agreement, petitioner paid $ 10,000 to ATC, and ATC provided him with legal title to the "telephone equipment" that was purportedly described in an attachment to the ATC pay phone agreement entitled "Telephone Equipment List". The attachment, however, did not identify any pay phones subject to*246 the agreement. The ATC pay phone 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(s) as are designated by Owner.
b. Owner agrees*19 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.
Exhibit E, "Buy Back Election", to the ATC pay phone agreement 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-six months after the
equipment delivery date, the sale price shall be the Owner's
*20 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.
Exhibit E further stated:
4.0 Maintenance Requirements For Buy Back Provision : If
Purchaser elects to require Seller to re-purchase the Pay
Telephone Equipment, Purchaser must establish to Seller's
satisfaction that all repairs and maintenance, as set forth in
Exhibit "B", have been performed as required. This means that
the regular maintenance "recommended" in Exhibit "B" is
mandatory. Purchaser will establish that regular maintenance and
repairs have been performed*21 on the Equipment by maintaining a
logbook. The logbook must set forth the dates and times
maintenance and repairs were made to the Equipment, who
performed the repairs and maintenance, and by retaining receipts
and cancelled checks for all parts, service, and repairs made to
the Equipment. Purchaser will be required to surrender, to
Seller, the logbook and all other proof establishing that
required maintenance and repairs were performed. Purchaser must
also establish to Seller's satisfaction the *247 person(s) who
performed the repairs and maintenance were qualified to do so.
Exhibit B to the ATC pay phone agreement set forth a recommended schedule of weekly maintenance work to be performed on the pay phones by petitioner. Exhibit C to the ATC pay phone agreement included a list of service providers available to maintain the pay phones should petitioner not want to service the phones himself. Petitioner also had the option to enter into a service agreement with Alpha Telcom (Alpha Telcom service agreement) if he did not want to be involved in the day-to-day maintenance of the pay phones.
Under the terms of the Alpha*22 Telcom service agreement, 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 and all "dial around fees" generated by the pay phones. In the event that a pay phone's adjusted gross revenue was less than $ 194.50 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 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 agreement, Alpha Telcom made it a practice to pay $ 58.34 per month per pay phone regardless of how little income the pay phone produced. Additionally, under the Alpha Telcom service agreement, Alpha Telcom negotiated the site agreement with the owner or leaseholder of the premises where the pay phones were to be installed, 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*23 all licenses needed to operate the pay phones, and took all actions necessary to keep the pay phones in working order. Petitioner signed the Alpha Telcom service agreement on June 7, 2001, the same day that he signed the ATC pay phone agreement.
In a letter dated June 11, 2001, petitioner received confirmation of his pay phone order and notice that an order had been placed for the installation of the pay phones. Petitioner had no say as to which pay phones were assigned to *248 him, and he was not informed as to the location of these pay phones.
Thell G. Prueitt (Prueitt), an agent and sales representative for ATC, informed petitioner that the income from the pay phones was taxable but that the pay phones were depreciable property and, thus, petitioner could claim a depreciation deduction with respect to the pay phones. Petitioner claimed a $ 714 depreciation deduction with respect to the pay phones on the Schedule C, Profit or Loss From Business, that was attached to his income tax return for 2001. Petitioner reported no other items of income or expense on this Schedule C.
Prueitt also informed petitioner that all of the amounts that petitioner spent in connection with the pay phones*24 qualified for the tax credit granted under
A salesperson for Alpha Telcom informed petitioner that the pay phones were modified by (1) lengthening the cords and/or reducing the height to make the pay phones accessible to the wheelchair bound and/or (2) installing volume controls to make them more useful to the hearing impaired. Alpha Telcom represented to investors that these modifications made the pay phones compliant*25 with the ADA. The ATC pay phone agreement also stated: "Phones have approved installation under the * * * [ADA]". Petitioner was not provided with a list of the modifications that were made to the pay phones that were assigned to him, and he did not know the cost of these modifications. Petitioner claimed a $ 1,894 tax credit with respect to the pay phones on Form 8826, Disabled Access Credit, that was attached to his income tax *249 return for 2001. For purposes of claiming this credit, petitioner reported that he had $ 10,000 of "eligible access expenditures" during 2001.
Alpha Telcom grew rapidly 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 case was later transferred to the U.S. Bankruptcy Court for the District of Oregon on September 17, 2001. On March 15, 2002, petitioner filed a proof of claim in the bankruptcy court in the amount of $ 11,166.80, representing the $ 10,000 that he had invested plus approximately 9 or 10 months of payments that he had not received from ATC as of the claim date. The bankruptcy*26 case 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 so that proceedings could continue in federal district court, where there 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.
Petitioner's Unreported Income
During 2001, petitioner received proceeds of $ 146,912.28 from the sale of stocks from his USB PaineWebber brokerage account. Petitioner also received dividends of $ 5,982.05 during 2001. Petitioner did not report the*27 stock sales or dividends on his income tax return for 2001. Respondent has conceded that the stock sales did not result in taxable gains.
*250 Internal Revenue Service Determinations
The Internal Revenue Service (IRS) disallowed the depreciation deduction claimed by petitioner because "the telephone is located in a place that * * * [petitioner did] not own or operate as a trade or business and * * * [petitioner] did not have depreciable interest in the pay phone". The IRS also disallowed the disabled access credit claimed by petitioner because "no business reason has been given or verified to comply with ADA of 1990".
Procedural Matters
The petition in this case was prepared by the office of Tom Buck, C.P.A. (Buck), and was filed with the Court on July 26, 2004. Buck's letterhead asserts: "Understanding how to play the game is half the battle." On September 8, 2004, Buck sent a letter to petitioner that stated that "my purpose was to work within the IRS system to buy you as much time as possible, before the IRS has a legal right to enforce collection action against you." By notice served October 5, 2004, this case was set for trial on March 7, 2005. Petitioner failed and refused*28 to appear for trial and attempted to withdraw his petition through a letter received by the Court on the day of trial.
Discussion
Burden of Proof
As a preliminary matter, we note that
Petitioner failed to appear at trial or to produce any credible evidence. Petitioner has no records or information as to where*29 the pay phones are located or as to the amount of revenue that they produced. Therefore, the burden of proof has not shifted to respondent. Nonetheless, our findings in this case are based on a preponderance of the evidence.
Depreciation Deduction
A taxpayer has received an interest in property that entitles the taxpayer to depreciation deductions only if the benefits and burdens of ownership with respect to the property have passed to the taxpayer. See
Petitioner contends that he "purchased" the*32 pay phones from ATC and, therefore, held the benefits and burdens of ownership with respect to the pay phones. After considering the relevant factors and weighing the facts and circumstances surrounding the transactions among petitioner, ATC, and Alpha Telcom, we reject petitioner's contention for the reasons discussed below.
First, petitioner had no control over the pay phones, never had possession of the pay phones, and does not know what the pay phones look like or where they are located. Petitioner signed an agreement containing blank spaces where the pay phones were to be identified.
Second, petitioner never had the power to select the location of the pay phones or enter into site agreements with the owners or leaseholders of the premises where the pay phones were to be located; that power was held by Alpha Telcom through the Alpha Telcom service agreement.
Third, no evidence indicates that petitioner paid any property taxes, insurance premiums, or license fees with respect to the pay phones.
*253 Fourth, there was minimal risk of loss for petitioner because the ATC pay phone agreement, in combination with the Alpha Telcom service agreement, allowed petitioner to sell legal title*33 to the pay phones back to ATC for 10 percent less than the amount that he invested in them in the first 36 months and for the full amount that he invested in them after 36 months.
Fifth, under the terms of the Alpha Telcom service agreement, Alpha Telcom was entitled to receive most of the profits from the pay phones.
Sixth, at the time that Alpha Telcom declared bankruptcy, petitioner filed a claim in bankruptcy court for the "price" of the pay phones and the monthly payments that he had not received from ATC, rather than taking possession of the pay phones or hiring an alternative service provider to maintain the pay phones. This action supports the conclusion that petitioner was not the actual owner of the pay phones.
Seventh, although petitioner received legal title to the pay phones under the terms of the ATC pay phone agreement, the Alpha Telcom service agreement passed all of the responsibilities for maintaining the pay phones and the risks associated with the pay phones' producing insufficient revenues to Alpha Telcom. Therefore, when the ATC pay phone agreement and the Alpha Telcom service agreement are construed together, it becomes clear that petitioner received nothing*34 more than bare legal title with respect to the pay phones.
Eighth, the transaction into which petitioner entered with ATC was more akin to a security investment than a sale. In essence, petitioner made a one-time payment of $ 10,000 to ATC for the opportunity to receive (1) a minimum annual return of 14 percent on that investment, i.e., a minimum monthly payment of $ 58.34 per pay phone, and (2) the tax benefits that he believed would result from his nominal "ownership" of the pay phones.
Therefore, based upon our analysis of the facts and circumstances surrounding the transactions among petitioner, ATC, and Alpha Telcom, we conclude that petitioner did not receive the benefits and burdens of ownership with respect to the pay phones. Because petitioner never received a depreciable interest in the pay phones, he is not entitled to claim a depreciation deduction under
*254 ADA Tax Credit
For purposes of the general business credit under
For purposes of
*255 Petitioner contends that he is eligible to claim the disabled access credit under
In order for an expenditure to qualify as an eligible access expenditure within the meaning given that term by
The general rule of ADA title III is that no individual shall be discriminated against on the basis of disability in the full and equal enjoyment of goods, services, facilities, privileges, advantages, or accommodations of any place of public *256 accommodation by any person who owns, leases, leases to, or operates a place of public accommodation.
To summarize, any person who owns, leases, or operates a public accommodation is required*40 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 in accord with their ordinary and natural meaning. See, e.g.,
ADA title IV requires common carriers providing telephone voice transmission services to provide "telecommunications relay services" throughout the area in which they offer service.
It has long been held that "'a common carrier is such by virtue of his occupation,' that is by the actual activities he carries on".
Because petitioner's pay phone activities did not obligate him to comply with the requirements set forth in either ADA title III or title IV, his $ 10,000 investment in the pay*43 *258 phones is not an eligible access expenditure. Therefore, petitioner is not entitled to claim the disabled access credit under
Whenever it appears to the Court that proceedings before it have been instituted or maintained primarily for delay, the Court, in its decision, may require the taxpayer to pay to the United States a penalty not in excess of $ 25,000.
To reflect the foregoing and the concessions of the parties,
Decision will be entered under
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