                                           JOSEPH VERIHA AND CHRISTINA F. VERIHA, PETITIONERS v.
                                             COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
                                                    Docket No. 7099–10.                         Filed August 8, 2012.

                                                  During 2005, P–H was the sole owner of JVT, a C corpora-
                                               tion in the trucking business, and he actively participated in
                                               JVT’s business. JVT leased the tractors and trailers used in
                                               its business from TRI, an S corporation in which P–H owned
                                               99% of the shares of stock, and JRV, a single-member LLC in
                                               which P–H was the only member. The lease of each tractor
                                               and each trailer was governed by a separate contract. During
                                               2005, TRI generated net income and JRV generated a net
                                               loss. On their 2005 joint return Ps treated the net income
                                               from TRI as passive income and treated the net loss from JRV
                                               as a passive loss. R determined that, pursuant to sec. 1.469–
                                               2(f)(6), Income Tax Regs. (sometimes referred to as the ‘‘self-
                                               rental rule or the recharacterization rule’’), each tractor and
                                               each trailer should be considered a separate ‘‘item of property’’
                                               and that the income P–H received from TRI should be re-
                                               characterized as nonpassive income. Ps contend that the
                                               entire collection of tractors and trailers is one ‘‘item of prop-
                                               erty’’. Held: For purposes of sec. 1.469–2(f)(6), Income Tax
                                               Regs., each individual tractor or trailer was an ‘‘item of prop-
                                               erty’’ and the income P–H received from TRI was subject to
                                               recharacterization.

                                        Amy L. Barnes and Robert Edward Dallman, for peti-
                                     tioners.
                                        Laurie B. Downs, for respondent.


                                                                                                                                   45




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                                     46                  139 UNITED STATES TAX COURT REPORTS                                     (45)


                                                                                  OPINION

                                        WELLS, Judge: Respondent determined a deficiency in peti-
                                     tioners’ 2005 Federal income tax of $258,785 and an
                                     accuracy-related penalty pursuant to section 6662(a) of
                                     $51,757. 1 Respondent concedes that petitioners are not liable
                                     for the penalty. The issue we must decide is whether the
                                     income petitioner Joseph Veriha received from an S corpora-
                                     tion in which he owned 99% of the stock should be re-
                                     characterized as nonpassive income pursuant to section
                                     1.469–2(f)(6), Income Tax Regs. (sometimes referred to as the
                                     ‘‘self-rental rule or the recharacterization rule’’).

                                                                               Background
                                       The parties submitted the instant case fully stipulated,
                                     without trial, pursuant to Rule 122. The parties’ stipulations
                                     of fact are hereby incorporated by reference and are found
                                     accordingly. Petitioners are husband and wife who resided in
                                     Wisconsin at the time they filed their petition.
                                       Mr. Veriha is the sole owner of John Veriha Trucking, Inc.
                                     (JVT), a corporation with its principal place of business in
                                     Wisconsin. JVT was a C corporation during 2005 but has
                                     since elected S corporation status. Petitioners were both
                                     employed by JVT during 2005, and Mr. Veriha materially
                                     participated in JVT’s business. JVT is a trucking company that
                                     leases its trucking equipment from two different entities,
                                     Transportation Resources, Inc. (TRI), and JRV Leasing, LLC
                                     (JRV). The trucking equipment JVT leases consists of two
                                     parts: a motorized vehicle (tractor) and a towed storage
                                     trailer (trailer).
                                       TRI is an S corporation in which Mr. Veriha owns 99% of
                                     the stock; his father owns the remaining 1%. TRI is an equip-
                                     ment leasing company with its principal place of business in
                                     Wisconsin. TRI owns only the tractors and trailers that it
                                     leases to JVT. During 2005, TRI and JVT entered into 125
                                     separate lease agreements, one for each tractor or trailer
                                     leased. TRI’s only source of income during 2005 was the
                                     leasing agreements with JVT.
                                       JRV is a single-member limited liability company, and Mr.
                                     Veriha is its sole member. JRV is an equipment leasing com-
                                       1 Unless otherwise indicated, section references are to the Internal Revenue Code of 1986

                                     (Code), as amended, and Rule references are to the Tax Court Rules of Practice and Procedure.




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                                     (45)                           VERIHA v. COMMISSIONER                                         47


                                     pany that owns only the tractors and trailers that it leases
                                     to JVT. During 2005, JRV and JVT entered into 66 separate
                                     lease agreements, one for each tractor or trailer leased. JRV’s
                                     only source of income during 2005 was the leasing agree-
                                     ments with JVT.
                                        Each tractor was leased to JVT as one unit, and each
                                     trailer was leased to JVT as one unit. The monthly rate for
                                     leasing each tractor was determined by the tractor’s age, and
                                     the monthly rate for leasing each trailer was determined by
                                     the type of trailer. During 2005, the tractors and trailers
                                     owned by TRI and JRV were all parked in the same lot and
                                     were intermingled. All the tractors were painted the same
                                     yellow color, and all received the same scheduled mainte-
                                     nance. JVT paid the expenses for all of the tractors and
                                     trailers and insured all the tractors and trailers under the
                                     same blanket insurance policy. In determining which tractor
                                     or trailer to use on a route, JVT made no distinction between
                                     those TRI owned and those JRV owned. Similarly, when it
                                     assigned drivers, JVT did not make any distinction on the
                                     basis of the ownership of the tractor or trailer.
                                        During 2005, TRI generated net income, which it reported
                                     to Mr. Veriha on a Schedule K–1, Partner’s Share of Income,
                                     Deductions, Credits, etc. Petitioners treated that net income
                                     as passive income on their return.
                                        During 2005, JRV generated a net loss, which petitioners
                                     reported on their Schedule C, Profit or Loss From Business.
                                     Petitioners treated that loss as a passive loss on their return.
                                        Respondent issued a notice of deficiency to petitioners in
                                     which respondent determined that petitioners’ income from
                                     TRI should be recharacterized as nonpassive income pursuant
                                     to section 1.469–2(f)(6), Income Tax Regs. Petitioners timely
                                     filed their petition in this Court.

                                                                                Discussion
                                       Section 469(a) disallows the passive activity loss of an indi-
                                     vidual taxpayer. Passive activity losses are suspended until
                                     the taxpayer either has offsetting passive income or disposes
                                     of the taxpayer’s entire interest in the passive activity. Sec.
                                     469(b), (g). Congress enacted the passive activity rules in
                                     response to concern about the widespread use of tax shelters




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                                     48                  139 UNITED STATES TAX COURT REPORTS                                     (45)


                                     in which taxpayers were avoiding tax on unrelated income.
                                     See Schaefer v. Commissioner, 105 T.C. 227, 230 (1995).
                                        The Code defines ‘‘passive activity’’ as an activity involving
                                     the conduct of a trade or business in which the taxpayer does
                                     not materially participate. Sec. 469(c)(1). However, the term
                                     ‘‘passive activity’’ generally includes any rental activity,
                                     regardless of material participation. Sec. 469(c)(2), (4). Sec-
                                     tion 469 does not define ‘‘activity’’. See Schwalbach v.
                                     Commissioner, 111 T.C. 215, 223 (1998). However, the Sec-
                                     retary has prescribed regulations pursuant to section 469(l)
                                     that specify what constitutes an ‘‘activity’’. Section 1.469–
                                     4(c), Income Tax Regs., sets forth rules for grouping activities
                                     together to determine what constitutes a single ‘‘activity’’.
                                     That regulation provides: ‘‘One or more trade or business
                                     activities or rental activities may be treated as a single
                                     activity if the activities constitute an appropriate economic
                                     unit for the measurement of gain or loss for purposes of sec-
                                     tion 469.’’ Sec. 1.469–4(c)(1), Income Tax Regs. Whether
                                     activities constitute an ‘‘appropriate economic unit’’ depends
                                     on the facts and circumstances. Sec. 1.469–4(c)(2), Income
                                     Tax Regs.
                                        Section 469(d)(1) defines ‘‘passive activity loss’’ as ‘‘the
                                     amount (if any) by which—(A) the aggregate losses from all
                                     passive activities for the taxable year, exceed (B) the aggre-
                                     gate income from all passive activities for such year.’’ A pas-
                                     sive activity loss is computed by first netting items of income
                                     and loss within each passive activity and then subtracting
                                     aggregate income from all passive activities from aggregate
                                     losses from all passive activities. See id.; sec. 1.469–2T, Tem-
                                     porary Income Tax Regs., 53 Fed. Reg. 5686 (Feb. 25, 1988).
                                        In carrying out the provisions of section 469, section
                                     469(l)(2) authorizes the Secretary to promulgate regulations
                                     ‘‘which provide that certain items of gross income will not be
                                     taken into account in determining income or loss from any
                                     activity (and the treatment of expenses allocable to such
                                     income)’’. While the general rule of section 469(c)(2)
                                     characterizes all rental activity as passive, section 1.469–
                                     2(f)(6), Income Tax Regs., requires net rental income received
                                     by the taxpayer for use of an item of the taxpayer’s property
                                     in a business in which the taxpayer materially participates
                                     to be treated as income not from a passive activity, and pro-
                                     vides:




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                                     (45)                           VERIHA v. COMMISSIONER                                         49


                                        (f)(6) Property rented to a nonpassive activity.—An amount of the tax-
                                     payer’s gross rental activity income for the taxable year from an item of
                                     property equal to the net rental activity income for the year from that item
                                     of property is treated as not from a passive activity if the property—
                                        (i) Is rented for use in a trade or business activity * * * in which the
                                     taxpayer materially participates * * *.

                                     A taxpayer’s activities include activities conducted through C
                                     corporations that are subject to section 469. Sec. 1.469–4(a),
                                     Income Tax Regs.
                                         Section 1.469–2(f)(6), Income Tax Regs., explicitly re-
                                     characterizes as nonpassive net rental activity income from
                                     an ‘‘item of property’’ rather than net income from the entire
                                     rental ‘‘activity’’. Section 469 and the regulations thereunder
                                     distinguish between net income from an ‘‘item of property’’
                                     and net income from the entire ‘‘activity’’, which might
                                     include rental income from multiple items of property. Even
                                     when items of property are grouped together in one activity,
                                     section 1.469–2(f)(6), Income Tax Regs., still applies to re-
                                     characterize rental income from an item of property as non-
                                     passive income. Carlos v. Commissioner, 123 T.C. 275, 282
                                     (2004).
                                         The parties disagree about the definition of the phrase
                                     ‘‘item of property’’. In the notice of deficiency, respondent
                                     determined that the income from TRI should be recharacter-
                                     ized as nonpassive income. The notice of deficiency does not
                                     explain the rationale for that recharacterization, and peti-
                                     tioners contend that the notice of deficiency determined that
                                     each fleet of tractors and trailers TRI and JRV owned was a
                                     separate ‘‘item of property’’ and that the income from TRI
                                     should be recharacterized pursuant to section 1.469–2(f)(6),
                                     Income Tax Regs. However, on brief respondent contends
                                     that the notice of deficiency determined that each individual
                                     tractor or trailer is an ‘‘item of property’’ but that respondent
                                     elected not to challenge the offsetting of income and losses
                                     with respect to each tractor or trailer within TRI or JRV. In
                                     contrast, petitioners contend that the entire collection of trac-
                                     tors and trailers, i.e., all the tractors and trailers whether
                                     owned by TRI or JRV, constitutes a single ‘‘item of property’’.
                                         Because neither the Code nor the regulations define the
                                     phrase ‘‘item of property’’, we follow the established rule of
                                     construction that an undefined term is given its ordinary
                                     meaning. See FDIC v. Meyer, 510 U.S. 471, 476 (1994); Gates




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                                     50                  139 UNITED STATES TAX COURT REPORTS                                     (45)


                                     v. Commissioner, 135 T.C. 1, 6 (2010). When seeking to
                                     ascertain the ordinary meaning of a term, a court may look
                                     for assistance to sources such as dictionaries. Muscarello v.
                                     United States, 524 U.S. 125, 127–132 (1998); Gates v.
                                     Commissioner, 135 T.C. at 6.
                                         Webster’s Third New International Dictionary 1203 (2002)
                                     provides the following definitions of the term ‘‘item’’: ‘‘an
                                     individual thing (as an article of household goods, an article
                                     of apparel, an object in an art collection, a book in a library)
                                     singled out from an aggregate of the individual things * * *
                                     item applies chiefly to each thing in a list of things or in a
                                     group of things that lend themselves to listing (an item in a
                                     laundry list) (each item of income) (an item in an inventory).’’
                                     Webster’s Ninth New Collegiate Dictionary 643 (1990) simi-
                                     larly defines ‘‘item’’ as ‘‘a separate particular in an enumera-
                                     tion, account, or series’’. The American Heritage Dictionary
                                     of the English Language 930 (2000) defines ‘‘item’’ as ‘‘[a]
                                     single article or unit in a collection, enumeration, or series.’’
                                     Black’s Law Dictionary 908 (2009) defines ‘‘item’’ as ‘‘[a] piece
                                     of a whole’’. In all of the foregoing dictionary definitions
                                     ‘‘item’’ is defined as a separate thing that is part of a larger
                                     collection. Those definitions support respondent’s contention
                                     that each separate tractor or trailer is an ‘‘item of property’’.
                                     Indeed, the articulation of petitioners’ argument requires the
                                     use of a term such as ‘‘collection’’, ‘‘group’’, or ‘‘whole’’, all of
                                     which serve to distinguish the collection of tractors and
                                     trailers from any single tractor or trailer, i.e., any single
                                     ‘‘item of property’’. Accordingly, we conclude that each indi-
                                     vidual tractor or trailer is an ‘‘item of property’’ within the
                                     meaning of section 1.469–2(f)(6), Income Tax Regs.
                                         However, as one court has noted, the definition of the term
                                     ‘‘item’’ is context specific:
                                     [T]he dictionary definition * * * is of little value because ‘‘items’’ is a rel-
                                     ative term whose contours are constructed by context. Only when meas-
                                     ured by the remaining particulars in a given classification can one discern
                                     whether a designation is an item. Thus, we are left * * * with deter-
                                     mining the meaning of ‘‘items’’ as used in the statute without an accom-
                                     panying list of associated particulars. That being so, reasonable persons
                                     could differ on the degree of specificity inherent in the term. [United States
                                     v. Zheng, 768 F.2d 518, 523 (3d Cir. 1985).]

                                     Although we conclude that each tractor and each trailer is a
                                     separate item of property, we can conceive of cases in which




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                                     (45)                           VERIHA v. COMMISSIONER                                         51


                                     the result would be different. For example, if JVT had always
                                     used each tractor with one particular trailer and if the lease
                                     agreements between JVT and TRI and JRV were for particular
                                     tractor-trailer pairs, then each tractor-trailer combination
                                     might be considered an ‘‘item of property’’.
                                         Petitioners contend that accepting respondent’s argument
                                     that each tractor and each trailer is an ‘‘item of property’’
                                     would compel absurd results such as, for example, that a
                                     business renting tools would have to recharacterize income
                                     with respect to each individual tool. However, that would not
                                     necessarily be the case; rather, it would be the case only if
                                     the context suggested that each tool should be considered an
                                     ‘‘item of property’’. If, for instance, the business leased tool
                                     sets and only tool sets, then each set might be considered an
                                     ‘‘item of property’’. If, on the other hand, as in the instant
                                     case, the lease of each tool were governed by a separate lease
                                     agreement with a separate price, then we would not consider
                                     absurd the result that the business would have to recharac-
                                     terize income on that basis.
                                         Petitioners contend that respondent’s position is at odds
                                     with that taken by the Commissioner in Shaw v. Commis-
                                     sioner, T.C. Memo. 2002–35, in which the Commissioner
                                     reclassified as nonpassive the net rental income from various
                                     properties, including ‘‘over the road trailers’’. In Shaw, for
                                     purposes of section 1.469–2(f)(6), Income Tax Regs., the
                                     Commissioner treated all of the over the road trailers as one
                                     item of property. We are not persuaded by petitioners’
                                     contention. We have repeatedly held that, even with respect
                                     to the same taxpayer, the Commissioner is not bound in any
                                     given year to allow the same treatment as in prior years. See,
                                     e.g., Pekar v. Commissioner, 113 T.C. 158, 166 (1999);
                                     Murphy v. Commissioner, 92 T.C. 12, 15 (1989); Lee v.
                                     Commissioner, T.C. Memo. 2006–70. As we stated in Murphy
                                     v. Commissioner, 92 T.C. at 15: ‘‘The erroneous past actions
                                     of respondent cannot be relied upon to allow * * * [the treat-
                                     ment of an item] not permitted by statute.’’ Certainly, the
                                     same would be true as to different taxpayers. Accordingly, we
                                     conclude that respondent is not bound to treat petitioners’
                                     tractors and trailers as one item of property even though the
                                     Commissioner may have treated the over-the-road trailers in
                                     Shaw as one item of property. Moreover, it is not even clear
                                     that, in Shaw, the Commissioner actually treated all of the




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                                     52                  139 UNITED STATES TAX COURT REPORTS                                     (45)


                                     over-the-road trailers as one item of property. Indeed, the
                                     Commissioner’s treatment of the trailers in Shaw is con-
                                     sistent with respondent’s position in his brief that, although
                                     respondent considers each individual tractor or trailer a
                                     separate item of property, respondent is electing not to chal-
                                     lenge petitioners’ offset of the income and losses from each
                                     item of property within TRI and JRV.
                                         Petitioners further contend that, within the trucking
                                     industry, the phrase ‘‘item of property’’ typically refers to an
                                     entire fleet of trucks. However, petitioners cite no authority
                                     for that proposition, and we find it implausible. Indeed, even
                                     within the context of the instant case, Mr. Veriha’s decision
                                     to hold the entire fleet of tractors and trailers under the title
                                     of two different entities is inconsistent with the proposition
                                     that the entire fleet is viewed as a single ‘‘item of property’’.
                                     Moreover, that proposition is also inconsistent with the fact
                                     that JVT entered into a separate lease agreement with TRI or
                                     JRV for each tractor and each trailer it leased. Indeed, those
                                     separate lease agreements strongly suggest that JVT, TRI, and
                                     JRV viewed each of the tractors or trailers as a separate
                                     ‘‘item of property’’.
                                         As we stated in Shaw v. Commissioner, T.C. Memo. 2002–
                                     35, a taxpayer ‘‘must accept the tax consequences of his busi-
                                     ness decisions and the manner in which he chose to structure
                                     his business transactions.’’ Or, as the Supreme Court has
                                     stated: ‘‘[W]hile a taxpayer is free to organize his affairs as
                                     he chooses, nevertheless, once having done so, he must
                                     accept the tax consequences of his choice, whether con-
                                     templated or not, and may not enjoy the benefit of some
                                     other route he might have chosen to follow but did not.’’
                                     Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co.,
                                     417 U.S. 134, 149 (1974) (internal citations omitted).
                                         On the basis of the foregoing, we conclude that each indi-
                                     vidual tractor and each trailer was a separate ‘‘item of prop-
                                     erty’’ within the meaning of section 1.469–2(f)(6), Income Tax
                                     Regs. However, because respondent has not contested peti-
                                     tioners’ netting of gains and losses within TRI, only TRI’s net
                                     income is recharacterized as nonpassive income. 2
                                       2 We note that this result is necessarily more favorable to petitioners than the result would

                                     have been had respondent contended that it was necessary for the income from each tractor or
                                     trailer within TRI and JRV to be recharacterized as nonpassive.




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                                     (45)                           VERIHA v. COMMISSIONER                                         53


                                        In reaching these holdings, we have considered all the par-
                                     ties’ arguments, and, to the extent not addressed herein, we
                                     conclude that they are moot, irrelevant, or without merit.
                                        To reflect the foregoing,
                                                                         Decision will be entered under Rule 155.

                                                                               f




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