T.C. Summary Opinion 2005-122
UNITED STATES TAX COURT
ARTHUR R. KOSKELA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8129-04S. Filed August 11, 2005.
Arthur R. Koskela, pro se.
Chris J. Sheldon, for respondent.
PANUTHOS, Chief 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. The decision
to be entered is not reviewable by any other court, and this
opinion should not be cited as authority. Unless otherwise
indicated, all subsequent section references are to the Internal
Revenue Code in effect at relevant times.
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Respondent determined deficiencies of $4,875, $4,875, and
$1,514 in petitioner’s Federal income taxes for the taxable years
2000, 2001, and 2002, respectively. The deficiencies were due to
respondent’s disallowance of a tax credit regarding petitioner’s
investment in pay telephones (pay phones) for each of the years
in issue.
The sole issue for decision is whether petitioner is
entitled to claim tax credits under section 44 for his
investments in the pay phones for 2000, 2001, and 2002.
We note that the Court recently issued an Opinion in the
case of Arevalo v. Commissioner, 124 T.C. 244 (2005). The facts
in this case, relating to the investments in pay phones, are
virtually identical to the facts in Arevalo. Thus, the Opinion
in Arevalo is controlling.
Background
Some of the facts have been stipulated, and they are so
found. The stipulation of facts and the attached exhibits are
incorporated by this reference. Petitioner resided in Phoenix,
Arizona, at the time the petition was filed.
Petitioner entered into three separate contracts dated
August 18, 2000, November 7, 2000, and January 2, 2001, with ATC,
Inc. (ATC), a wholly owned subsidiary of Alpha Telcom, Inc.
(Alpha Telcom), entitled “Telephone Equipment Purchase Agreement”
(ATC pay phone agreements).
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Under the terms of the ATC pay phone agreements, petitioner
paid $5,000 per pay phone to ATC, and ATC provided petitioner
with legal title to the “telephone equipment” that was
purportedly described in an attachment to the ATC pay phone
agreements, entitled “Telephone Equipment List”. The attachment,
however, did not identify any pay phones subject to the
agreements. Only identification numbers, the locations of 2 of
the 11 pay phones, and sale prices were provided. The ATC pay
phone agreements 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 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.
d. Phones have approved installation under The
American with Disabilities Act.
The “Buy Back Election” to the ATC pay phone agreements 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-
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six months after the equipment delivery date, the sale price
shall be the Owner’s 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.[1]
An exhibit to the ATC pay phone agreements includes a list
of service providers available to maintain the pay phones should
petitioner not want to service the pay phones himself.
Petitioner had the option to enter into service agreements if he
did not want to be involved in the day-to-day maintenance of the
pay phones. Petitioner entered into service agreements with
Alpha Telcom (Alpha Telcom service agreements) for the servicing
of his pay phones. Petitioner never changed service providers,
nor did he contact any other service provider to inquire about
service options for his pay phones.
Under the terms of the Alpha Telcom service agreements,
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. In the event that a pay
phone’s adjusted gross revenue was less than $58.34 for the
month, Alpha Telcom would waive or reduce the 70-percent fee and
1
There are minor variations in the terms of the buyback
elections, none of which are material.
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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 agreements,
Alpha Telcom made it a practice to pay up to $58.34 per month per
pay phone, regardless of how little income the pay phones
produced. Additionally, under the Alpha Telcom service
agreements, Alpha Telcom negotiated the site agreement with the
owner or leaseholder of the premises where the pay phones were to
be installed. Alpha Telcom 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 all licenses needed to operate the pay phones,
and took all actions necessary to keep the pay phones in working
order.
ATC sent petitioner an undated Payphone Purchase &
Installation Confirmation document to confirm the order and
installation of the pay phone for the August 18, 2000, contract.
Petitioner received letters (dated November 7, 2000, and January
10, 2001) to confirm the order and installation of the pay phones
for the November 7, 2000, and January 5, 2001, contracts.
Petitioner was not able to select the pay phones that would be
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randomly assigned to him. Petitioner does not know where all of
the pay phones assigned to him were located.
Sometime around August 2000, an ATC/Alpha Telcom sales
representative gave petitioner a flyer from an entity named Tax
Audit Protection, Inc. The flyer provided information about
Alpha Telcom pay phones. It stated that owners of Alpha Telcom
pay phones qualified for tax credits for compliance with the
Americans with Disabilities Act of 1990 (ADA), Pub. L. 101-336,
104 Stat. 327, and that “owners of Alpha Telcom payphones” could
be eligible for tax credits of $2,500 per phone, up to $5,000
maximum, per year. The flyer identified a person named George
Mariscal as the president of the company.
Alpha Telcom modified the pay phones to be accessible to the
disabled: (1) By adjusting the cord length so that the pay
phones 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
pay phones were installed. Alpha Telcom represented to investors
that the modifications made to the pay phones complied with ADA
requirements. The ATC pay phone agreements state that “Phones
have approved installation under The * * * (ADA)”. The
confirmation letters also state that “These phones qualify under
the 1990 Americans with Disabilities Act, as amended”.
Petitioner was not provided with a list of the modifications that
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were made to the pay phones that were assigned to him, and he did
not know the cost of these modifications.
Petitioner claimed a $4,875 tax credit for 2000, a $4,875
tax credit for 2001, and a $2,375 tax credit for 2002 on Forms
8826, Disabled Access Credit, with respect to the pay phones,
that were attached to his Federal income tax returns for the
years in issue.
Alpha Telcom grew rapidly through its pay phone 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 July 26, 2002, petitioner filed a proof of claim in the
bankruptcy court in the amount of $90,000, representing the
$90,000 that he had invested.2 The bankruptcy matter 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 the bankruptcy matter so that
proceedings could continue in Federal District Court, where there
2
Petitioner’s $90,000 payment represented the amount he
paid for a total of 18 pay phones. Petitioner purchased 7 pay
phones from ATC, in addition to the 11 pay phones petitioner had
previously purchased from ATC. Petitioner did not claim a sec.
44 credit for the additional 7 pay phones. Those pay phones are
not before the Court.
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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.
Respondent disallowed the disabled access credits petitioner
claimed because “no business reason, to comply with the Americans
With Disabilities Act of 1990, has been given and verified to
claim the credit”.
Discussion
I. Burden of Proof
Section 7491 is applicable to this case because the
examination in connection with this action was commenced after
July 22, 1998, the effective date of that section. See Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L.
105-206, sec. 3001(c)(1), 112 Stat. 727. Under section 7491, the
burden of proof shifts from the taxpayer to the Commissioner if
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the taxpayer produces credible evidence with respect to any
factual issue relevant to ascertaining the taxpayer’s tax
liability. Sec. 7491(a)(1).
Petitioner has not argued that he has satisfied any of the
criteria of section 7491(a)(1) or (2). In any event, the burden
of proof does not play a role in the case before us, because
there is no dispute as to a factual issue.
II. ADA Tax Credit
In Arevalo v. Commissioner, 124 T.C. at 254, we discussed in
some detail the interplay of the general business credit under
section 38 and the disabled access credit under section 44(a).
We concluded that the taxpayer’s investment in the pay phones did
not constitute an eligible access expenditure and thus found it
unnecessary to consider whether the taxpayer’s pay phone
activities constituted an eligible small business. Id. at 255.
We explained that “In order for an expenditure to qualify as an
eligible access expenditure within the meaning given that term by
section 44(c), it must have been made to enable an eligible small
business to comply with the applicable requirements under the
ADA”. Id. (and cited cases thereat).
We summarized in Arevalo as follows:
any person who owns, leases, leases to, or operates a
public accommodation is required 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
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in accord with their ordinary and natural meaning.
See, e.g., Smith v. United States, 508 U.S. 223, 228
(1993); Neff v. Am. Dairy Queen Corp., 58 F.3d 1063,
1066 (5th Cir. 1995) (construing the term “operate”, as
used in ADA title III, as follows: “To ‘operate,’ in
the context of a business operation, means ‘to put or
keep in operation,’ ‘to control or direct the
functioning of,’ ‘to conduct the affairs of; manage,’”
(citations omitted)). [Id. at 256.]
Consistent with our conclusion in Arevalo, we conclude that
petitioner did not own, lease, or operate anything as a result of
his investments in the pay phones and was never under an
obligation to comply with the requirements of ADA title III
during the years in issue. See id. We further conclude, as we
did in Arevalo, that petitioner was under no obligation to comply
with ADA title IV during the years in issue, since petitioner was
not actively engaged in the provision of services to anyone as a
result of his investments in the pay phones. See id. at 257 (and
cases cited thereat). Respondent is sustained on this issue.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered for
respondent.