- 16 -
See also Schwalbach v. Commissioner, 111 T.C. 215, 225-226
(1998).
2. Whether Petitioner Meets the Incidental Activity
Exception Conditions
To qualify for the incidental activity exception by having a
rental of property treated as incidental to a trade or business
activity, a taxpayer must meet three conditions. See sec. 1.469-
1(T)(e)(3)(vi)(C)(1)-(3), Temporary Income Tax Regs., 53 Fed.
Reg. 5703 (Feb. 25, 1988). First, the taxpayer must own an
interest in the trade or business. Second, the property at issue
must predominantly be used in the trade or business during the
taxable year or during at least 2 of the 5 immediately preceding
taxable years. Third, the gross rental income from the property
for the taxable year must be less than 2 percent of the lesser of
(i) the unadjusted basis of the property and (ii) the fair market
value of such property. Petitioner meets these requirements.
Petitioner owns an interest in the law firm as its exclusive
owner. On the basis of the evidence, the equipment leased to the
law firm was integral to the operation of the law firm. The
equipment was crucial in petitioner presenting his cases, and
petitioner’s particular skill with the equipment increased his
renown in the class-action field. Finally, the parties do not
dispute that petitioner’s gross rental income from the equipment
leasing activity met the percentage requirement, because
petitioner received no rental income during the years at issue.
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