                  T.C. Summary Opinion 2002-146



                     UNITED STATES TAX COURT



               VINCENT S. SCIABICA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9392-01S.               Filed November 13, 2002.


     Vincent S. Sciabica, pro se.

     Frank W. Louis, for respondent.



     PAJAK, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   Unless otherwise

indicated, section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.   The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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       Respondent determined deficiencies of $6,580 and $4,232 in

petitioner’s 1995 and 1996 Federal income taxes, respectively.

This Court must decide whether losses claimed by petitioner are

subject to the passive activity loss limitations under section

469.

       Some of the facts in this case have been stipulated and are

so found.    Petitioner resided in Albany, New York, at the time he

filed his petition.

       During the taxable years at issue, petitioner owned 34.72

percent of the outstanding shares of VBR Corporation (VBR).     VBR

is an S corporation, which owns and operates bowling alleys.

       In 1995, VBR sought financing in order to purchase automatic

scoring equipment (equipment).    Because of VBR’s loss history,

the company was unable to obtain the requisite financing.     One

lender was willing to make a loan directly to petitioner.

Petitioner secured the loan and purchased the equipment.

Subsequently, petitioner entered into a written lease agreement

with VBR reflecting the lease of petitioner’s equipment to VBR

(the lease agreement).

       The lease agreement was effective on August 1, 1995, and

would terminate on August 15, 2002.      The lease agreement provided

for monthly payments to be made by VBR to petitioner in the

amount of $3,320.07.    VBR was required to maintain the equipment

in good condition, to purchase insurance with respect to the
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equipment, and to pay any necessary taxes with respect to the

equipment.    Pursuant to the lease agreement, petitioner retained

title to the equipment, including any and all additions made to

it, and VBR bore all risk of loss or damage to the equipment.

VBR had an option to purchase the equipment for its fair market

value on the last day of the lease agreement.

     Financing statements covering the equipment were filed with

the Ohio Secretary of State and the Franklin County Recorder’s

Office.   The financing statements listed petitioner as lessor and

VBR as lessee.

     In 1995 and 1996, petitioner deducted losses on Schedule E,

Supplemental Income and Loss, of $23,024 and $22,724,

respectively, in connection with the equipment leased to VBR.

Respondent disallowed petitioner’s Schedule E loss deductions

with respect to the equipment leased to VBR for the taxable years

in issue.    Respondent also made automatic adjustments based on

these disallowances.

     Respondent contends that the equipment leasing activity was

a passive rental activity and that the related loss deductions

for the taxable years in issue were subject to the passive loss

limitations of section 469.    Petitioner contends that the

equipment leasing activity was not a passive activity and relies

upon the exception to passive activity classification found in

section 1.469-1T(e)(3)(ii)(F), Temporary Income Tax Regs., 53

Fed. Reg. 5702 (Feb. 25, 1988). In the alternative, petitioner
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contends that if the leasing activity is determined to be a

passive activity, the passive activity losses can be grouped with

his share of income from VBR in accordance with the grouping

exception found in section 1.469-4(d)(1)(A), Income Tax Regs.

     Taxpayers generally bear the burden of proving that the

Commissioner’s determination is incorrect.     Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933).   The record reflects that section

7491 does not apply in this case.

     Section 469(a)(1) limits the deductibility of losses from

certain passive activities of individual taxpayers.    Generally, a

passive activity includes the conduct of a trade or business in

which the taxpayer does not materially participate.    Sec.

469(c)(1)(A) and (B).   A rental activity (except certain rental

activity involving real estate) is generally treated as a passive

activity without regard to whether the taxpayer materially

participates.   Sec. 469(c)(1), (2), (4).   Rental activity is

defined as "any activity where payments are principally for the

use of tangible property."   Sec. 469(j)(8).   Under the literal

language of the statute, petitioner’s equipment leasing activity

is a rental activity, and section 469(a) applies.

     Petitioner contends that the leasing activity is not a

rental activity because it qualifies as an exception to the

definition of a rental activity under section

1.469-1T(e)(3)(ii)(F), Temporary Income Tax Regs.    That

regulation states that an activity is not a rental activity under
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paragraph (e)(3)(vii) of that section if the property is provided

for use in an activity conducted by a partnership, S corporation,

or joint venture in which the taxpayer owns an interest.    The

short answer is that petitioner did not provide property to VBR.

Petitioner leased property to VBR.

       Petitioner contends that he had an agency, not a lease,

relationship with VBR and that VBR should be regarded as the

lessors of the equipment.    The evidence suggests to the contrary.

In light of the form of the written lease agreement, under Ohio

law the arrangement between petitioner and VBR with respect to

petitioner’s equipment constituted a lease from petitioner to

VBR.    Ohio Rev. Code Ann. sec. 1310.01(A)(10) (Anderson 2001)

(“‘Lease’” means a transfer of the right to possession and use of

goods for a term in return for consideration.”); Hairston v.

Commissioner, T.C. Memo. 2000-386.

       The equipment was provided by petitioner to VBR in his

capacity as a lessor and not a shareholder.    Accordingly, we hold

that the exception to the characterization of a rental activity

as a passive activity found in the regulation above is not

applicable in this case.

       In the alternative, petitioner contends that if he was

engaged in a rental activity during the taxable years in issue

for purposes of the passive activity loss limitations, then he is

entitled to group the loss from his rental activity with his
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share of income from VBR’s trade or business activity of

operating bowling alleys under the exception in section 1.469-

4(d)(1)(A), Income Tax Regs., on the ground that the rental

activity is “insubstantial” in relationship to the business

activity of VBR.   Petitioner merely makes this assertion without

citing any applicable authority and without any legal analysis.

     The record lacks any evidence to support the argument that

the rental activity was insubstantial with respect to VBR’s trade

or business.   Therefore, we hold that petitioner cannot group

together his rental activity and VBR’s trade or business for

purposes of the passive activity loss limitations of section 469.

     For all the foregoing reasons, respondent’s determinations

in the notice of deficiency are sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                            Decision will be entered

                                       for respondent.
