Robert W. and Lila L. Blewett - Page 6




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          bird, and it’s not going to lay any more eggs.”  Accordingly,               
          payments were made only when either petitioner or Don Blewett               
          needed the money to make payments to creditors for leased                   
          equipment.                                                                  
               Petitioners claimed a net loss of $50,033 from their                   
          equipment leasing activity on Schedule C, Profit or Loss From               
          Business (Sole Proprietorship), of their 1996 Federal income tax            
          return.3  In the notice of deficiency, respondent disallowed the            
          entire loss on the ground that the leasing activity was subject             
          to the passive loss limitations of section 469.                             
          Discussion                                                                  
               Section 469(a)(1) limits the deductibility of losses from              
          certain passive activities.  Generally, a passive activity                  
          includes the conduct of a trade or business in which the taxpayer           
          does not materially participate.  Rental activity is generally              
          treated as a passive activity without regard to whether the                 
          taxpayer materially participates.4  Sec. 469(c)(1), (2), (4).               
          Rental activity is defined as “any activity where payments are              
          principally for the use of tangible property.”  Sec. 469(j)(8).             


               3The loss was attributable primarily to deductions of                  
          $30,062 and $17,141 for depreciation and sec. 179 expenses,                 
          respectively.                                                               
               4A statutory exception that was added in 1993 provides that            
          certain real estate operators need not treat their interests in             
          rental real estate as passive activities.  Sec. 469(c)(7).  That            
          exception is inapplicable here, because the subject of this                 
          controversy is personal property.                                           





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