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.