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activities as including rental activities. The notice of
deficiency that the Commissioner sent the Lees disallowed their
losses from Lee Brothers Investments and their other real estate
ventures because the Commissioner concluded that they were all
“rental real estate activities,” and so per se passive. The
Commissioner also reduced the size of the depreciation expenses
that the Lees had taken on two of their properties, because they
had used a 10-year useful life rather than the 27.5-year life
clearly required by law. The Lees had no good reason for having
done this, and conceded the issue before trial.
The trial focused on whether the brothers’ work on their
rental real estate qualified them for an exception to the Code’s
characterization of rental activities as passive. The exception
that they aimed for is section 469(c)(7)(B), and it applies if:
(i) more than one-half of the personal
services performed in trades or businesses by
the taxpayer during such taxable year are
performed in real property trades or
businesses in which the taxpayer materially
participates, and
(ii) such taxpayer performs more than
750 hours of services during the taxable year
in real property trades or businesses in
which the taxpayer materially participates.
In the case of a joint return, the requirements of the
preceding sentence are satisfied if and only if either
spouse separately satisfies such requirements. * * *
There are a few elements to this exception about which there
is no dispute. First, for both years and in both cases, this
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Last modified: May 25, 2011