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May 05, 2010

Of all the stupid tax shelters ever marketed, the one promising disabled-access credits for investors in pay phones was definitely one of them. The investor would engage in a shaky lease with phone provider Alpha Telecom. Alpha made token investements to make the phones "ADA compliant" by giving the phones a longer cord and a volume control.

Flickr image courtesy joelogon under Creative Commons license.

The 8th Circuit Court of Appeals yesterday snuffed out the hopes for this deal for three Missouri investors. The Tax Court described the deal of one investor:

Petitioner received only bare legal title to the pay phones. He never had control over or possession of the pay phones, and all information regarding the pay phone locations came from Alpha Telcom.8 Alpha Telcom controlled the location of and entered into site agreements for the pay phones, collected monthly revenues, paid vendor commissions and fees, and repaired and maintained the pay phones. Alpha Telcom was entitled to 70 percent of the monthly adjusted gross revenues as long as they exceeded $58.34. The record does not show that petitioner paid any property taxes, insurance premiums, or license fees with respect to the pay phones.

Petitioner also bore no risk of loss with respect to the pay phones. Alpha Telcom agreed to buy back the pay phones from petitioner for a fixed price stated in the pay phone purchase agreement. Alpha Telcom often paid petitioner a base amount of $58.34 per month regardless of pay phone profits.

The Moral: If your deal wouldn't convince a well-informed sixth-grader, it's not going to get past the courts either.

Cites:

Loveland, CA-8 NO. 09-2404
Doherty, CA-8, No. 09-2407
Snyeder, CA-8, NO. 09-2911