Depreciation

Pay Telephone Investor Denied Depreciation Deduction and Disabled Access Credit

Ys contend that they purchased four pay telephones for which they are entitled to a Sec. 44 disabled access credit and depreciation under Sec. 167.

Depreciation

Ys claim they are entitled to depreciation as owners of the telephones, because they purchased the phones. To determine whether a sale has been completed, the entire transaction has to be examined; see Segall, 114 F2d 706 (6th Cir. 1940). The transfer of title and possession are both important aspects of completing a sale. Also, as stated in Upham, 923 F2d 1328 (8th Cir. 1991), the following are important factors:

1. How the parties treat the transaction;

2. Whether the purchaser acquired any equity in the property;

3. Whether the purchaser has any control over the property and, if so, the extent of such control;

4. Whether the purchaser bears the risk of loss or damage to the property; and

5. Whether the purchaser will receive any benefit from the operation or disposition of the property.

Ys entered into purchase and service agreements with A, Inc. A, not Ys, en-tered into agreements with those who owned or leased the properties where the phones were going to be located; conducted all maintenance on the phones; collected the money from the phones; kept the majority of profits above $58.34 collected from the phones each month; and managed the phones. Thus, A had primary control over the phones.

When reviewing the agreements together, it is apparent that the benefits and burdens of ownership of the phones did not pass from A to Ys. Although it appears that legal title passed to them, the parties did not treat Ys as the true owners. They did not acquire any equity in the property, because when A declared bankruptcy, the phones were not returned by the bankruptcy trustee to Ys as property in which they had an equitable interest.

A bore the risk of loss or damage to the property, because (1) Ys could sell the phones back to A at any time for the purchase price minus a 10% restocking fee and (2) Ys were guaranteed to make $58.34 per month on the phones, even if they brought in less. Finally, because A was entitled to the majority of profits above $58.34, Ys did not receive any significant benefit from operating the phones. Thus, Ys were not entitled to the depreciation deduction, because they did not own the phones.

Disabled Access Credit

Sec. 44 provides that an eligible small business is entitled to a credit for expenditures to enable it to comply with the Americans With Disabilities Act of 1990 (ADA). Eligible expenditures include amounts paid to remove communication and physical barriers that “prevent a business from being accessible to, or usable by, individuals with disabilities,” and amounts paid “to acquire or modify equipment or devices for” the disabled; see Sec. 44(c)(2)(A) and (D).

Before purchasing the phones, Ys were not denying phone service to disabled individuals because the individuals were disabled; see Stephen Fan, 117 TC 32 (2001). Further, they were not violating the ADA before they purchased the phones, so purchasing them did not enable them to become ADA-compliant.

Moreover, even if the phones were located at places that qualified under the ADA as “places of public accommodation,” Ys did not have a duty to ensure that the phones were ADA-compliant, because they were not themselves the owners, lessors, lessees or operators of the places of public accommodation; see 42 USC Section 12182(a) and (b)(2)(A); Sec. 44(c); and Stoutenborough, 59 F3d 580, 582–83 (6th Cir. 1995). In fact, as discussed above, Ys did not “own” the phones; A entered into the lease agreements for the phones’ locations with the owners of those locations. Thus, Ys were mere investors in the phones; they did not have a duty to be compliant with Title III of the ADA because they did not own, lease or operate any place of public accommodation; see Edward R. Arevalo, 124 TC 244 (2005).

Also, Ys were not “common carriers” obligated to supply “telecommunications relay services” in the areas where their phones were located, as described in Title IV of the ADA; see 47 USC Section 225(c). They did not own or operate the pay phones—A did that for them. Thus, because Ys were not “actively engaged in the provision of services to others,” they were not common carriers obligated to make the phones compliant with Title IV of the ADA; see Arevalo, 124 TC at 257. Accordingly, they were not required to comply with either Title III or IV of the ADA and cannot take the disabled access tax credit under Sec. 44.

Daniel A. Crooks, 6th Cir., 5/25/06