T.C. Memo. 2000-32
UNITED STATES TAX COURT
WILLIAM WARREN KELLY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2457-98. Filed January 28, 2000.
William Warren Kelly, pro se.
Robert V. Boeshaar, for respondent.
MEMORANDUM OPINION
POWELL, Special Trial Judge: Respondent determined
deficiencies in petitioner's 1993 and 1994 Federal income taxes
in the amounts of $1,631 and $2,014, respectively. The issue is
whether petitioner's aircraft leasing activity is a passive
activity under section 469.1 Petitioner resided in Springfield,
Oregon, at the time he filed his petition.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
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Background
The facts may be summarized as follows. During 1993 and
1994, petitioner was employed full time by a logging company as
an equipment operator and mechanic. In 1993, petitioner owned
six fixed-wing light aircraft, two of which he purchased in
December 1993. In 1994, petitioner purchased an additional
aircraft. During 1993 and 1994, petitioner entered into aircraft
leasing agreements with Friendly Air Service, Inc. or other fixed
base flight schools (collectively Friendly Air) in the Eugene,
Oregon, area.
Under the lease agreements, Friendly Air leased the aircraft
from petitioner. Friendly Air would in turn use the aircraft for
flight instructions or rent them to other pilots at hourly rates.
Petitioner does not have a commercial pilot’s license and cannot
give flight instructions or transport paying passengers. The
leases were for 1 year but could be canceled with a 30-day
written notice. Friendly Air scheduled all flights and was
responsible for routine cleaning, maintenance, and fueling of the
aircraft. Petitioner received $34 per hour of flying time.
Petitioner was responsible for the payment of all fuel,
maintenance, repair costs, and premiums for commercial insurance.
Friendly Air maintained financial records for the leasing of the
aircraft. Petitioner did not keep any contemporaneous logs or
records of the aircraft activities. The parties, however, agree
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that petitioner did spend at least 500 hours each year in
conjunction with the activity.
Petitioner claimed losses from his aircraft leasing
activities in the amounts of $11,274 and $27,014 for 1993 and
1994, respectively. Respondent disallowed those losses as
passive activity losses.
Discussion
Section 162 allows deductions for ordinary and necessary
expenses incurred in carrying on a trade or business. Section
212 allows deductions for ordinary and necessary expenses
incurred for the production of income or the management or
maintenance of property held for the production of income.
Section 469, however, limits the deductions for losses from any
"passive activity".
A passive activity is any activity involving the conduct of
a trade or business in which the taxpayer does not materially
participate. See sec. 469(c)(1)(A) and (B). All rental
activities are generally passive. See sec. 469(c)(2).
Furthermore, a rental activity is passive whether or not the
taxpayer materially participates. See sec. 469(c)(4); Frank v.
Commissioner, T.C. Memo. 1996-177. An activity is a rental
activity if (1) during the taxable year the tangible property
held in connection with the activity is used or held for use by
customers and (2) the gross income attributable to the conduct of
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the activity represents amounts paid for the use of the tangible
property. See sec. 469(j)(8); sec. 1.469-1T(e)(3)(i), Temporary
Income Tax Regs., 53 Fed. Reg. 5702 (Feb. 25, 1988). Under the
literal language of the statute, petitioner is engaged in a
rental activity and section 469(a) applies.
The regulations provide several exceptions where activities
involving tangible property will not be considered rental
activities. See sec. 1.469-1T(e)(3)(ii), Temporary Income Tax
Regs., 53 Fed. Reg. 5702 (Feb. 25, 1988). Petitioner, however,
has not directed us to any specific provision of the regulations.
Morever, we have examined these provisions and do not find any
relief for petitioner. For example, section 1.469-
1T(e)(3)(ii)(A) and (B), Temporary Income Tax Regs., 53 Fed. Reg.
5702 (Feb. 25, 1988), provides that, if the period of customer
use is 7 days or less (or 30 days or less and there are
significant personal services provided by the taxpayer), the
activity involving the use of tangible personal property is not a
rental activity. But, under the facts here, the lessee is
Friendly Air, and the leases were on a yearly basis. Even if
petitioner satisfied the other requirements, the exceptions in
the regulations would not apply.
Petitioner also may contend that the exception contained in
section 469(i) is applicable because he “actively participated”
in the activity. Sec. 469(i)(1). But that section applies only
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to “rental real estate activities”. Id.; see also Frank v.
Commissioner, supra.
In sum, petitioner’s leasing of the aircraft is a rental
activity and, as such, is a passive activity under the statute
and the regulations. While petitioner may have materially
participated in the activity, material participation does not
exempt the activity from the passive loss rules contained in
section 469.
Decision will be entered
for respondent.