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In Arevalo, we discussed eight factors in considering the
substance, rather than the labels, of the agreement between the
taxpayer and the seller. Just as we concluded in Arevalo, we
conclude here that the factors work against petitioners.
Petitioners did not have control over or possession of the pay
phones. Petitioners did not have the power to select the
location of the pay phones or enter into site agreements with
owners or leaseholders of the premises where the pay phones were
to be located. There is no evidence that petitioners paid any
property taxes, insurance premiums, or license fees. There was
minimal risk because of the ability of petitioners to sell legal
title to the pay phones back to ATC at a fixed formula price.
Alpha Telcom was entitled, pursuant to the agreement, to receive
most of the profits from the pay phones. At the time of the
bankruptcy of Alpha Telcom, petitioners did not take possession
of the pay phones or hire an alternative provider, but rather
filed a claim in bankruptcy court for the price of the pay phones
and monthly payments not received. All responsibilities for
maintaining the pay phones and risks associated with the pay
phones’ producing insufficient revenues remained with Alpha
Telcom. The transaction was more like a security investment than
a sale, whereby petitioners made a one-time payment to ATC in
return for an opportunity to receive a minimum annual return per
pay phone and the tax benefits of “ownership”.
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Last modified: May 25, 2011