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equipment, and to pay any necessary taxes with respect to the
equipment. Pursuant to the lease agreement, petitioner retained
title to the equipment, including any and all additions made to
it, and VBR bore all risk of loss or damage to the equipment.
VBR had an option to purchase the equipment for its fair market
value on the last day of the lease agreement.
Financing statements covering the equipment were filed with
the Ohio Secretary of State and the Franklin County Recorder’s
Office. The financing statements listed petitioner as lessor and
VBR as lessee.
In 1995 and 1996, petitioner deducted losses on Schedule E,
Supplemental Income and Loss, of $23,024 and $22,724,
respectively, in connection with the equipment leased to VBR.
Respondent disallowed petitioner’s Schedule E loss deductions
with respect to the equipment leased to VBR for the taxable years
in issue. Respondent also made automatic adjustments based on
these disallowances.
Respondent contends that the equipment leasing activity was
a passive rental activity and that the related loss deductions
for the taxable years in issue were subject to the passive loss
limitations of section 469. Petitioner contends that the
equipment leasing activity was not a passive activity and relies
upon the exception to passive activity classification found in
section 1.469-1T(e)(3)(ii)(F), Temporary Income Tax Regs., 53
Fed. Reg. 5702 (Feb. 25, 1988). In the alternative, petitioner
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