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year or during at least two of the five taxable
years that immediately precede the taxable year;
and
(3) The gross rental income from such
property for the taxable year is less than two
percent of the lesser of--
(i) The unadjusted basis of such
property; and
(ii) The fair market value of such
property.
Respondent’s sole argument is that the “incidental”
exception does not apply because the equipment leasing activity
was not incidental to any other activity of Cilena. Petitioner
contends that the trade or business activities of Aeternum are
trade or business activities of petitioner for purposes of this
exception.
A “trade or business activity”, for purposes of the
“incidental” exception, is defined as an activity (other than a
rental activity or an activity incidental to the activity of
holding property for investment) that: (1) Involves the conduct
of a trade or business (within the meaning of section 162); (2)
is conducted in anticipation of the commencement of a trade or
business; or (3) involves research or experimental expenditures
that are deductible under section 174.9 Sec. 1.469-4(b)(1),
9Sec. 1.469-1T(e)(3)(vi)(C), Temporary Income Tax Regs., 53
Fed. Reg. 5703 (Feb. 25, 1988), references paragraph (e)(2) for
the definition of “trade or business activity.” Paragraph (e)(2)
references sec. 1.469-1(e)(2), Income Tax Regs., which further
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