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activity is broadly defined as any activity involving the conduct
of a trade or business in which the taxpayer does not “materially
participate”. Sec. 469(c)(1). Rental activities are
presumptively passive activities, regardless of whether the
taxpayer materially participates. Sec. 469(c)(2), (4); Tarakci
v. Commissioner, T.C. Memo. 2000-358; Frank v. Commissioner, T.C.
Memo. 1996-177. A rental activity “means any activity where
payments are principally for the use of tangible property.”12
Sec. 469(j)(8).
Respondent’s argument is straightforward: Petitioners’
rental activities are passive in nature, and any losses therefrom
cannot be used to offset petitioners’ nonpassive income for the
years at issue. Thus, it is respondent’s position that the loss
deductions claimed on petitioners’ returns are currently
unavailable and are suspended until a future date when
petitioners have passive gains. See sec. 469(b). Petitioners,
on the other hand, assert that they are subject to one of the
exceptions to the presumption in favor of passive classification.
12It is clear that petitioners’ leasing of equipment to
Pauline’s Concrete is a rental activity within the purview of
sec. 469. See Tarakci v. Commissioner, T.C. Memo. 2000-358;
Kelly v. Commissioner, T.C. Memo. 2000-32; Welch v. Commissioner,
T.C. Memo. 1998-310.
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Last modified: May 25, 2011