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The sublease agreements between Hairston and the end users
typically had terms of 7.93 days in 1995 and 11.63 days in 1996.
All of petitioners’ equipment was leased to end users in the name
of and under lease agreements with Hairston, not with
petitioners.
On their 1995 and 1996 joint Federal income tax returns,
with regard to the lease of their equipment, petitioners claimed
Schedule C ordinary deductions under section 162, reported rental
income from Hairston, and claimed net losses after depreciation
as follows:
Sec. 162
Year Expenses Rental Income Net Losses
1995 $1,371 1 $15,000 $58,899
1996 350 37,500 38,499
1 On audit for 1995, respondent charged petitioners with
an additional $22,800 in unreported income from the lease of
their equipment, to which additional income petitioners agree.
OPINION
Section 469(a)(1) limits the deductibility of losses from
certain passive activities of individual taxpayers. Generally, a
passive activity includes the conduct of a trade or business in
which the taxpayer does not materially participate. In addition,
rental activity (except certain rental activity involving real
estate) is generally treated as a passive activity without regard
to whether the taxpayer materially participates. See sec.
469(c)(1), (2), (4), (7).
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Last modified: May 25, 2011