Income from an individual’s trucking business was recharacterized as nonpassive after particular trucks leased to the individual were recharacterized as multiple “item[s] of property” under Reg. §1.469-2(f)(6) . The taxpayer owned and materially participated in a trucking business, and controlled two companies from which the trucking business leased its tractors and trailers. On his tax return, he listed income from one leasing company and a net loss from the other, both classified as passive under Code Sec. 469 . While income from a rental activity is generally characterized as passive under Code Sec. 469(c)(3) , income from an “item of property” rented to, and for use in, a nonpassive activity in which the taxpayer materially participates, such as the taxpayer’s trucking business, is treated as nonpassive.
The court rejected the taxpayer’s contention that the entire fleet of trucks from both leasing companies was a single item of property, holding that each tractor and each trailer was an item of property. The trucking business entered into a separate lease agreement for each tractor and each trailer it leased. There was no evidence produced that a fleet of trucks is customarily treated as a single item of property in the trucking industry. Therefore, the IRS properly treated income from the leasing company as nonpassive. However, because the IRS did not challenge the taxpayer’s netting of gains and losses within the leasing company that generated income, only that company’s net income was recharacterized as nonpassive, producing a result more favorable to the taxpayer than if income from each tractor and trailer had been recharacterized.
J. Veriha, 139 TC —, No. 3, Dec. 59,155
Other References:
Code Sec. 469
CCH Reference – 2012FED ¶21,966.568
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CCH Reference – TRC BUSEXP: 33,506
