                       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.
