T.C. Memo. 2007-363



                      UNITED STATES TAX COURT



          JOSEPH M. AND MARJORIE SITA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10068-05.                Filed December 10, 2007.



     Joseph M. Sita, pro se.

     Trent D. Usitalo, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes for 2001 and 2002 (years at

issue) of $3,121 and $2,100.1


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and Rule references are to
the Tax Court Rules of Practice and Procedure. Amounts are
                                                   (continued...)
                                 - 2 -

     After concessions,2 the issues for decision are:    (1)

Whether petitioners are entitled to a depreciation deduction of

$2,143 under section 167 for 2001; (2) whether petitioners are

entitled to a disabled access credit under section 44 for 2001;

and (3) whether petitioners are entitled to a business expense

deduction of $14,000 under section 162 for 2002.

                          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.   Petitioners resided in

New Richmond, Wisconsin, when they filed their petition.

A.   Procedural History

     This case, commenced on June 1, 2005, was previously

continued because of the pendency of related litigation in two

U.S. Courts of Appeals (referred to herein as the Alpha Telcom

cases).   See Arevalo v. Commissioner, 

(5th Cir.

2006), affg. 

(2005); Crooks v. Commissioner, 

(6th Cir. 2006).   The Alpha Telcom cases are concluded,

and the decisions entered in those cases are final.     In each

case, the Tax Court sustained the Commissioner’s deficiency


     1
      (...continued)
rounded to the nearest dollar.
     2
       Respondent concedes that petitioners qualify for an
education credit for 2001. However, the amount of the education
credit that they are entitled to depends on their adjusted gross
income.
                               - 3 -

determination, and in each case the U.S. Court of Appeals has

affirmed the decision of this Court.   See Arevalo v.

; Crooks v. 

.     In short,

this Court and the Courts of Appeals have consistently held that

a taxpayer’s investment in an arrangement involving pay phones

marketed by Alpha Telcom, Inc. (Alpha Telcom), and its wholly

owned subsidiary American Telecommunications Co., Inc. (ATC), did

not support either:   (1) A depreciation deduction under section

167 because the taxpayer did not have the requisite benefits and

burdens of ownership to support a depreciable interest in the pay

phones; or (2) a disabled access credit under section 44, because

the investment was not an eligible access expenditure.

B.   Background

     Alpha Telcom marketed a pay phone investment program through

ATC to thousands of investors nationwide.   Alpha Telcom

represented that the pay phones included modifications such as

longer cords, volume controls, and/or other features that

facilitated their use by persons with disabilities.     Alpha Telcom

also represented to investors that the modifications made to the

pay phones complied with the requirements of the Americans with

Disabilities Act of 1990 (ADA), Pub. L. 101-336, 104 Stat. 327.

     On June 2, 2001, petitioners entered into separate contracts

with ATC entitled “Telephone Equipment Purchase Agreement” (ATC

pay phone agreements) to purchase a total of seven pay phones at
                               - 4 -

a cost of $5,000 per pay phone.   Pursuant to the ATC pay phone

agreements, petitioners paid $35,000 to ATC, and ATC purportedly

provided petitioners with legal title to the “telephone

equipment” which was described in an attachment to the ATC pay

phone agreements, entitled “Telephone Equipment List”.    However,

the attachment did not identify the pay phones subject to the

agreement, the prices, or the locations.   Furthermore,

petitioners were not provided with a list of the modifications

that were made to the pay phones they purchased, and they did not

know the cost of these modifications.

     The ATC pay phone agreements also provided a “Buy Back

Election” which was valid for 7 years.   Under its terms, Alpha

Telcom had the right of first refusal in the event petitioners

were to sell a pay phone.   The buy back election also provided

that if petitioners elected to sell a pay phone back to ATC

within 36 months of the date of delivery, they would be refunded

the entire purchase price minus a 10-percent restocking fee.     If

the buy back election was made after 36 months, they would be

refunded the entire purchase price without a restocking fee.

     On June 2, 2001, each petitioner also entered into a

separate “Telephone Services Agreement” with Alpha Telcom (Alpha

Telcom service agreements) with a term of 3 years.   Under its

terms, Alpha Telcom was responsible for selecting the location of

the pay phones, negotiating site agreements with the owners or
                                 - 5 -

lessees of the premises where the pay phones were to be

installed, installing the pay phones, obtaining all licenses

needed to operate the pay phones, insuring and maintaining the

pay phones, collecting and accounting for the revenues generated

by the pay phones, and paying vendor commissions and fees.

     In return, Alpha Telcom was entitled to 70 percent of the

revenues the pay phones generated, while petitioners were

entitled to the balance.   In the event that a pay phone’s

adjusted gross revenue was less than $194.50 for the month, the

Alpha Telcom service agreements provided that Alpha Telcom would

waive or reduce the 70-percent fee and pay petitioners 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, petitioners would receive 100 percent

of the adjusted gross revenue.    Notwithstanding this formula,

Alpha Telcom made it a practice to pay its investors $58.34 per

pay phone, regardless of the revenue actually received.

Petitioners’ pay phones were never installed, and they never

received a monthly return because Alpha Telcom filed for

bankruptcy shortly after petitioners entered into the ATC pay

phone agreements.   Petitioners never saw or took possession of

the pay phones.

     On August 24, 2001, Alpha Telcom filed for bankruptcy under

chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court
                                - 6 -

for the Southern District of Florida.   The matter was

transferred to the U.S. Bankruptcy Court for the District of

Oregon on September 17, 2001.   On March 12, 2002, petitioners

each filed a proof of claim with the bankruptcy court for a total

of $39,492.3   Petitioner did not receive any money from Alpha

Telcom or ATC or the pay phones they purchased.

C.   Claimed Deductions and Credits

     On April 12, 2002, petitioners jointly filed a Form 1040,

U.S. Individual Income Tax Return, for 2001, to which they

attached a Schedule C, Profit or Loss From Business, claiming a

depreciation deduction of $2,143 with respect to the seven pay

phones.   Petitioners also attached to the 2001 return a Form

8826, Disabled Access Credit, claiming a $5,000 tax credit with

respect to the seven pay phones.

     On April 12, 2003, petitioners filed a joint Form 1040 for

2002, to which they attached a Schedule C claiming an expense

deduction of $14,000 on line 27 as an “Other” expense.   In the


     3
       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
bankruptcy matter so that proceedings could continue in Federal
District Court, where there was a pending receivership involving
debtors.

     The Securities and Exchange Commission (SEC) brought a civil
suit against Alpha Telcom in 2001 in the U.S. District Court for
the District of Oregon. On Feb. 7, 2002, the District Court held
that the pay phone scheme was actually a security investment, and
Alpha Telcom had violated Federal law because it did not register
the program with the SEC. SEC v. Alpha Telcom, Inc., 187 F.
Supp. 2d 1250 (D. Or. 2002), affd. 

(9th Cir. 2003).
                                - 7 -

explanation section for the “Other” expense, petitioners stated

the $14,000 was for a “payout of phone equipment”.

      Thell Prueitt, a representative of Alpha Telcom, helped

petitioners prepare the 2001 and 2002 returns.

      Respondent issued a notice of deficiency on March 3, 2005,

disallowing the Schedule C deductions for 2001 and 2002 and the

Form 8826 credit for 2001.    Petitioners timely filed their

petition on June 1, 2005.

                               OPINION

I.   Burden of Proof

      Under section 7491, the burden of proof shifts from the

taxpayer to the Commissioner if the taxpayer produces credible

evidence with respect to any factual issue relevant to

ascertaining the taxpayer’s tax liability.    Sec. 7491(a)(1).

However, section 7491(a)(1) applies with respect to an issue only

if the taxpayer has complied with the requirements to

substantiate any item, has maintained all records, and has

cooperated with reasonable requests by the Commissioner for

witnesses, information, documents, meetings, and interviews.     See

sec. 7491(a)(2)(A) and (B).

      Although petitioners claimed that section 7491(a) applies,

they failed to introduce sufficient evidence to shift the burden

to respondent.   Nonetheless, our findings in this case are based
                                  - 8 -

on a preponderance of the evidence.       See Arevalo v. Commissioner,

.

II.   Depreciation Deduction

      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.

      Depreciation deductions are based on investment in and

actual ownership of property rather than on possession of bare

legal title.   See Arevalo v. Commissioner, 

; Grant

Creek Water Works, Ltd. v. Commissioner, 

, 326 (1988);

Narver v. Commissioner, 

, 98 (1980), affd. 

(9th Cir. 1982).   The transfer of formal legal title does not

shift the incidence of taxation attributable to ownership of

property where the transferor continues to retain significant

control over the property transferred.       Arevalo v. 

; Crooks v. 

; see

also Frank Lyon Co. v. United States, 

, 572-573

(1978); Grodt & McKay Realty, Inc. v. Commissioner, 

,

1236 (1981).

      If the benefits and burdens reflecting ownership have not

passed from “seller” to “purchaser”, the transfer of formal legal

title is disregarded when determining ownership of an asset for

purposes of depreciation.      See Arevalo v. Commissioner, 

9 -

at 439.    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 the light of the

attending facts and circumstances.      See Arevalo v. Commissioner,

-252; Grodt & McKay Realty, Inc. v. 

at 1237.

     The denial of depreciation deductions in the Alpha

Telcom cases has been supported by the examination of six

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.    Arevalo v. 

-440;

Crooks v. 

at 656; Arevalo v. Commissioner,

.

     If we consider the terms of the ATC pay phone agreements and

the Alpha Telcom service agreements together, Alpha Telcom was

responsible for selecting the locations of the pay phones,

negotiating site agreements with the owners or lessees of the

premises where the pay phones were to be installed, installing
                               - 10 -

the pay phones, obtaining all licenses needed to operate the pay

phones, insuring and maintaining the pay phones, collecting and

accounting for the revenues generated by the pay phones, and

paying vendor commissions and fees.     Petitioners never saw or

possessed the pay phones or knew where they were to be installed.

Furthermore, Alpha Telcom was entitled to receive most of the

profit, and it bore the risk of loss if the pay phones did not

generate sufficient revenue.   Regardless of the revenues actually

generated, petitioners were guaranteed to be paid at least $58.34

per month per pay phone.   See Arevalo v. 

, 253.   In addition, the ATC pay phone agreements allowed

petitioners to sell the pay phones back to ATC for a fixed

formula price.

     For the foregoing reasons, the Court finds that petitioners

did not receive the benefits and burdens of ownership with

respect to the seven pay phones.   Therefore, they are not

entitled to a depreciation deduction of $2,143 under section 167

for 2001.   See Arevalo v. Commissioner, 

.
                                  - 11 -

III. Disabled Access 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” means 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)

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

The term “eligible access expenditures” means amounts

paid or incurred by an eligible small business to enable the

eligible small business to comply with the requirements under the

ADA.4       Sec. 44(c)(1).


        4
       Such expenditures include amounts paid or incurred: (1)
To remove architectural, communication, physical, or
                                                   (continued...)
                              - 12 -

     As relevant here, the requirements set forth in the ADA

apply to:   (1) Persons who own, lease, lease to, or operate

certain places of “public accommodation”; and (2) any “common

carrier” of telephone voice transmission services.    See 42 U.S.C.

sec. 12182(a) (2000); see also 47 U.S.C. sec. 225(c) (2000).    A

person who does not have an obligation to comply with the

requirements set forth in the ADA could never make an eligible

access expenditure.   Arevalo v. Commissioner, 

.

     As in the Alpha Telcom cases, petitioners neither owned,

leased, leased to, or operated a public accommodation during

2001, nor were they a “common carrier” of telephone voice

transmission services during 2001.     See Arevalo v. 

; Crooks v. 

;

Arevalo v. Commissioner, 

-256.    Accordingly, the

Court finds that petitioners were not obligated to comply with


     4
      (...continued)
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 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 to
remove 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 Nov. 5, 1990. See sec.
44(c)(4).
                               - 13 -

the requirements set forth in the ADA during 2001.    See Arevalo

v. Commissioner, 

-256.    Therefore, petitioners are

not entitled to claim the disabled access credit under section 44

for their investment in the pay phones in 2001.    See

   Expense Deduction

       Respondent contends that petitioners were not entitled to

the $14,000 expense deduction under section 162(a) in 2002

because they failed to establish that they paid or incurred any

expenses with respect to a pay phone trade or business in 2002.

       Under section 162(a), a taxpayer may deduct ordinary and

necessary business expenses incurred or paid during the taxable

year.    The taxpayer is required to maintain records sufficient to

enable the Commissioner to determine his correct tax liability.

See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.    The taxpayer

has the burden to prove the Commissioner’s determination was

incorrect.    Rule 142(a).

       Petitioners produced no evidence to indicate that they paid

or incurred $14,000 of business expenses with respect to their

pay phone business in 2002.    On this record, the Court finds that

petitioners are not entitled to deduct the $14,000 as a business

expense under section 162(a) in 2002.

       Petitioners also testified that the $14,000 was not an

expense deduction but a depreciation deduction and they should
                             - 14 -

have claimed $24,750, instead of $14,000, which was the remainder

of the cost of the seven pay phones.   However, as the Court found

above, petitioners did not receive the benefits and burdens of

ownership with respect to the seven pay phones.   Therefore,

petitioners are not entitled to a depreciation deduction for any

amount under section 167 with respect to the seven pay phones in

2002.

     In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we find

them to be moot, irrelevant, or without merit.

     To reflect the foregoing,


                                         Decision will be entered

                                   under Rule 155.