Kenneth M. and Delores J. Hairston - Page 5




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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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