                        T.C. Memo. 2005-166



                      UNITED STATES TAX COURT



     FRED MISKO, JR. AND KAREN L. HOWE-MISKO, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12996-03.            Filed July 6, 2005.


     W. John Glancy and Robert E. Davis, for petitioners.

     Kathryn F. Patterson and Abbey B. Garber, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:   Respondent determined deficiencies in

petitioners’1 Federal income taxes for 1998 and 1999 based on

disallowing business expense deductions that petitioner claimed



     1
      Petitioner Karen Howe-Misko was not involved in petitioner
Fred Misko’s law practice, nor was she involved in leasing
equipment to his law practice. All references to petitioner are
to Fred Misko.
                                - 2 -

for equipment he purchased and leased to his wholly owned

professional corporation, Fred Misko, P.C. (the law firm).

     The issues for decision are whether petitioner was engaged

in an equipment leasing activity for profit under section 183,2

and whether the section 469 passive activity rules limit his

depreciation deductions.    We find that petitioner engaged in the

activity for profit.   To determine whether the passive activity

rules limit petitioner’s depreciation deductions, we must decide

whether petitioner qualifies for the incidental activity

exception to the passive loss rules.    We find that petitioner

qualifies.

                           FINDINGS OF FACT

     The parties have stipulated some facts.    The stipulation of

facts and the accompanying exhibits are incorporated by this

reference and are so found.

     Petitioner was a trial lawyer during the years at issue,

practicing in Dallas, Texas, through the law firm.3   Petitioner

has had a highly successful and varied practice throughout his

35-plus-year legal career.    When petitioner first began his law

practice, he managed about 100 cases a year, almost exclusively


     2
      All 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, unless otherwise
indicated.
     3
      The professional corporation was a closely held personal
services corporation subject to the provisions of subch. C.
                                - 3 -

on behalf of plaintiffs in personal injury actions.   Beginning in

the 1980s, however, petitioner shifted his focus to a more

specialized law practice, class actions.   Petitioner has been

very successful in this endeavor.

     A class-action-based legal practice is unique in several

ways.   Since petitioner began focusing on class actions, his case

volume has been smaller, the number of plaintiffs has been

significantly higher, the cases have been more complex, and his

income has increased and become more variable.   For example,

petitioner earned $7 million in 1996, but little to nothing from

1997 through 1999.   In 1998, petitioner had a $1.6 million loss,

and he earned only a small income in 1999.   In 2000, however,

petitioner earned over $6 million when a case he had expected to

close earlier finally closed.

     Class action cases also require a huge investment, in time

and money, including traveling abroad, deposing hundreds of

potential claimants, soliciting expensive experts, hiring highly

skilled personnel, purchasing expensive technical equipment, and

partnering with other law firms.    At one point, petitioner hired

approximately 80 people and situated them on the entire floor of

a modern office building.   In another case, which has been

ongoing for 13 years, petitioner has been representing some

26,000 banana workers from around the world who allegedly were

exposed to a toxic chemical rendering them sterile.   Petitioner
                                 - 4 -

is in a consortium of more than a dozen law firms to manage and

litigate that case.    Petitioner finances his cases by investing

an amount personally and then supplementing the remainder with

loans from a bank with which he has had a 15-plus-year working

relationship.

     Overall, it often takes longer to settle class action cases,

because of their complexity and the large number of class

members.   Predicting when a given case might settle, therefore,

is an imprecise art.

     The issue in this case comes from the manner in which

petitioner financially operated his law practice.    Each year

petitioner would sit down with his accountant, determine his

salary after expenses, and reinvest most of his after-tax salary

into the law firm.4    In the 1980s, petitioner’s salary began to

substantially increase, and finally, in 1991, he made his first

$1 million salary.     Petitioner testified that this prompted him

to reassess his tax posture to determine whether he might

appropriately minimize his tax burden.    His accountant

recommended the leasing arrangement at issue.

     Petitioner’s accountant said that if petitioner owned the

corporate equipment individually and leased it to the law firm,

he could lower his Medicare tax.    Petitioner paid 3 percent in


     4
      Petitioner reinvests his salary in the form of a loan, and
the law firm pays him interest at 6 percent.
                                - 5 -

Medicare tax on his wage income yearly.     Medicare tax, unlike

other payroll taxes, is not capped.     The idea was that if

petitioner could reduce his wage income and convert some portion

to lease payments instead, he could reduce his overall tax

burden.

     Even though petitioner stated that he was legally entitled

to lower his taxes, he was adamant about doing so in an

appropriate and legal manner.   The leasing arrangement was ideal

for petitioner, because it was not merely a tax avoidance

vehicle; rather, he would earn a return on the equipment, and he

expected the venture to be profitable.

     Moreover, petitioner specialized in the use of the leased

equipment in a class action setting.     It was a point of pride

with petitioner that he have the most modern computer graphics

and videotape equipment.   He wrote articles and delivered

lectures throughout the United States on the use of technology in

practicing law, particularly in the use of video reenactments,

videotape settlement brochures, and videotape mock trials.     His

lectures would address the kinds of equipment to purchase, what

prices to pay, and the level of skill required of employees to

operate the equipment.   To illustrate the complexity of the video

reenactments, petitioner testified that in one instance the law

firm charged over $80,000 for an elaborate recreation of a fiery
                                 - 6 -

truck crash.     Petitioner’s technical savvy served as a useful

marketing edge in soliciting new work.

     Petitioner first began the leasing arrangement in 1992 by

assigning law firm equipment to himself and leasing it to the law

firm.     He then purchased all future equipment personally and

leased it to the law firm.     The equipment petitioner leased to

the law firm consisted of computers, video equipment, and office

furniture.5    The original cost of the equipment used in the years

at issue was $1,840,157.     From 1992 through 1997, petitioner

received rental payments from the law firm totaling $1,040,000.

        Petitioner intended to receive an amount in rent generally

commensurate with the yearly depreciation deduction.        During the

years at issue, however, the law firm experienced a loss, and the

law firm made no rental payments.     Nor did the firm pay

petitioner a salary in those years.      The losses during those

years were attributable to a case that petitioner had expected to

close but that took until 2000 to close.      Ultimately,

petitioner’s leasing activity did not prove profitable,

principally because of the losses during the years at issue, and

he later sold the equipment to the law firm at book value for

$557,885.     The law firm paid petitioner by increasing the amount

it owed him.



     5
      The value of the office furniture was a small fraction of
the value of the assets he leased to the law firm.
                                 - 7 -

        Petitioner generally took depreciation deductions on the

equipment he leased the law firm using the modified accelerated

cost recovery system under section 168.     Respondent denied the

deductions only in 1998 and 1999, years in which petitioner

experienced losses.     Respondent argued that the leasing activity

losses were passive and not deductible without passive income.

Respondent later asserted, in an amended answer, that the

deductions should be denied because petitioner was not engaged in

the equipment leasing activity for profit.     Petitioner objected

and argued that he held the equipment for profit and that the

leasing activity was a nonrental activity in which he materially

participated.

        Respondent issued petitioners a deficiency notice on May 15,

2003, in which respondent determined deficiencies in petitioners’

Federal income taxes of $74,370 for 1998 and $66,379 for 1999.

Petitioners filed a timely petition.

                                OPINION

        The issues to be decided are, first, whether petitioner’s

equipment leasing activity was engaged in for profit under

section 183, and second, whether the equipment leasing activity

qualifies for the incidental activity exception under section

469.6


        6
      The Commissioner’s determinations in a deficiency notice
are generally presumed correct, and the taxpayer bears the burden
                                                   (continued...)
                                 - 8 -

I.   Whether the Equipment Leasing Activity Was Engaged In for
     Profit

     Generally, individuals are allowed to fully deduct losses

attributable to an activity engaged in for profit.     See secs.

183(a), 162(a), and 212.     A taxpayer must engage in an activity

with an actual and honest, even though unreasonable or

unrealistic, profit motive to deduct depreciation expenses.      See

Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir. 1990),

affg. 91 T.C. 686 (1988); Keanini v. Commissioner, 94 T.C. 41, 45

(1990); Hulter v. Commissioner, 91 T.C. 371, 392-393 (1988);

Fuchs v. Commissioner, 83 T.C. 79, 97-98 (1984); Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702

F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.;

see also sec. 162(a).     Although a reasonable expectation of

profit is not required, the taxpayer’s profit objective must be

bona fide.     Hulter v. Commissioner, supra; Beck v. Commissioner,

85 T.C. 557, 569 (1985); sec. 1.183-2(b), Income Tax Regs.       This

is a factual question, and to resolve it, we generally look to

nine nonexclusive factors.7    Sec. 1.183-2(b), Income Tax Regs.;


     6
      (...continued)
of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). Deductions are generally a matter of
legislative grace, and the taxpayer bears the burden to prove he
or she is entitled to the claimed deductions. INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934).
     7
         The factors in sec. 1.183-2(b), Income Tax Regs., are:
                                                      (continued...)
                              - 9 -

see Keanini v. Commissioner, supra at 46; Antonides v.

Commissioner, 91 T.C. at 694; Abramson v. Commissioner, 86 T.C.

360, 371 (1986); Dreicer v. Commissioner, supra at 645; Golanty

v. Commissioner, 72 T.C. 411, 426 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(a) and (b),

Income Tax Regs.

     The Court of Appeals for the Fifth Circuit, to which this

case is appealable, requires that the taxpayer engage in the

activity with the “primary purpose” of realizing an economic

profit independent of tax savings.    See Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987); Westbrook v. Commissioner,

68 F.3d 868, 875 (5th Cir. 1995), affg. T.C. Memo. 1993-634; cf.

Keanini v. Commissioner, supra.   We therefore apply the “primary

purpose” standard.

     Respondent concedes that he bears the burden of proof on

this issue because he raised the claim in an amended answer.    See

Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).    To

succeed, therefore, respondent must prove that petitioner did not


     7
      (...continued)
(1) The manner in which the taxpayer carried on the activity; (2)
the expertise of the taxpayer or his advisers; (3) the time and
effort expended by the taxpayer in carrying on the activity; (4)
the expectation that the assets used in the activity may
appreciate in value; (5) the success of the taxpayer in carrying
on other activities for profit; (6) the taxpayer’s history of
income or losses with respect to the activity; (7) the amount of
occasional profits, if any, which are earned; (8) the financial
status of the taxpayer; and (9) elements of personal pleasure or
recreation.
                               - 10 -

enter into the leasing activity with the primary purpose to

profit.

     Petitioner argues that we should group the equipment leasing

activity with his law practice in determining whether there was a

profit motive.   Alternatively, petitioner argues that, if we do

not group the activities, he engaged in the leasing activity for

profit.   Respondent counters that the leasing activity and the

law practice cannot be grouped because they are separate

activities, and that the leasing activity was not an activity

engaged in for profit.

     A.   Whether Petitioner’s Law Practice and His Leasing
          Activity May Be Grouped for Purposes of Section 183

     A taxpayer’s various activities may be viewed as a single

activity if they are sufficiently interconnected.      See sec.

1.183-1(d)(1), Income Tax Regs.      We look to the organizational

and economic interrelationship of the activities, their business

purpose, and their overall similarity in determining whether they

may be viewed collectively.    Id.    Further, the Commissioner will

generally accept a taxpayer’s characterization of his or her

various undertakings as one activity unless it appears that the

characterization is artificial and unsupported by the facts.         Id.

     Section 183 applies, however, only to individuals and S

corporations.    See sec. 1.183-1(a), Income Tax Regs. (extending

section 183 application to trusts and estates because they are

taxed as individuals).   Further, the section 183 regulations
                              - 11 -

explicitly except C corporations, stating that no inference may

be drawn from section 183 and its regulations as to whether a

corporation is engaged in an activity for profit.   Sec. 1.183-

1(a), Income Tax Regs.   The point of amalgamating two

undertakings into a single activity is to net the expenses of one

against the revenue of the other, an objective that cannot be

accomplished where one undertaking is that of a C corporation and

the other is an undertaking by an individual.   Because the law

firm was a C corporation, petitioner may not group the law firm

with his leasing activity for purposes of section 183.8

     B.   Whether the Activity Was Engaged In for Profit

     Although we agree with respondent that the leasing activity

and the law practice cannot be grouped, we nonetheless find that

respondent has failed to meet his burden to show that petitioner

did not engage in the leasing activity with the primary purpose

to earn a profit.   See Swaffar v. Commissioner, T.C. Memo. 1992-

180 (the Court did not affirmatively find that the taxpayers

lacked a profit objective, but rather found only that the

Commissioner failed to prove that the taxpayers lacked a profit



     8
      Petitioner also argues that, if we do not group the two
undertakings, the law firm’s profit objective still should be
attributed to his leasing activity. See Campbell v.
Commissioner, 868 F.2d 833 (6th Cir. 1989), revg. T.C. Memo.
1986-569; Wilkinson v. Commissioner, T.C. Memo. 1996-39; De
Mendoza v. Commissioner, T.C. Memo. 1994-314; Kuhn v.
Commissioner, T.C. Memo. 1992-460; cf. Baldwin v. Commissioner,
T.C. Memo. 2002-162. We need not resolve this issue.
                               - 12 -

objective, where the issue was raised by the Commissioner as a

new matter).   We start by noting that petitioner’s leasing

activity was not a hobby masquerading as a business.     See

Cornfeld v. Commissioner, 797 F.2d 1049, 1052 (D.C. Cir. 1986),

revg. T.C. Memo. 1984-105.   This distinguishes a large class of

cases where profit objective is reasonably placed in doubt

because the taxpayer derives an intangible personal benefit from

the purported business.    Id.; see Bessenyey v. Commissioner, 379

F.2d 252 (2d Cir. 1967) (raising Hungarian half-breds held not to

be an activity for profit), affg. 45 T.C. 261 (1965); sec. 1.183-

2(a), Income Tax Regs.    Further, nothing in the record suggests

that petitioner’s equipment was purchased for personal use.     See,

e.g., Westerman v. Commissioner, 55 T.C. 478 (1970); Fischer v.

Commissioner, 50 T.C. 164, 171 (1968).

     The record establishes without contradiction that petitioner

was an astute businessman and attorney.     He earned substantial

income from the law firm, and he accomplished this in part

through his expertise in operating the leased equipment, which

was crucial to his legal practice.      Further, petitioner engaged

in the leasing activity on the advice of his accountant, he used

the equipment solely for the law firm, he collected rent

consistently except during the years at issue, he had a high

degree of knowledge and skill related to the equipment, he kept

records regarding amounts invested, rents received, and
                               - 13 -

depreciation taken on the equipment, and he derived no personal

pleasure or recreation from using the equipment.    We also find

petitioner’s testimony as to his intent to profit from the

equipment leasing activity credible, thorough, and persuasive.

      Further, respondent argues that petitioner could not profit

on the amount he charged in rent, yet presented no evidence

regarding prevailing market rental rates for similar equipment.

Respondent also argues that petitioner should have sold the

equipment for fair market value rather than book value, but has

presented no evidence regarding the fair market value of the

equipment, particularly for computer equipment that may lose

value rapidly.   Consequently, respondent has not met his burden

to show that petitioner did not engage in the equipment leasing

activity with the primary purpose to earn a profit.    Commissioner

v. Groetzinger, 480 U.S. at 35; Wolf v. Commissioner, 4 F.3d 709,

713 (9th Cir. 1993), affg. T.C. Memo. 1991-212; Warden v.

Commissioner, T.C. Memo. 1995-176, affd. without published

opinion 111 F.3d 139 (9th Cir. 1997).

II.   Whether the Passive Loss Rules Preclude Petitioner From
      Deducting His Losses

      Respondent also argues that, if section 183 does not deny

petitioner the loss deduction, then the loss deduction should be

disallowed pursuant to the passive activity loss limitations.

See sec. 469.    Petitioner concedes that he has the burden of
                                  - 14 -

proof on this issue.       See Rule 142(a); Welch v. Helvering, 290

U.S. 111 (1933).

       Losses from a passive activity are generally not allowed as

a deduction for the year in which they are sustained, except to

the extent of passive activity income.       Sec. 469(a).   A passive

activity loss is the excess of the aggregate losses from all

passive activities for the taxable year over the aggregate income

from all passive activities for the year.        See sec. 469(d)(1).

       Passive activities are those activities involving the

conduct of a trade or business in which the taxpayer does not

materially participate.       Sec. 469(c)(1).   Rental activities are

presumptively passive, without regard to whether the taxpayer

materially participates in the activity.        See sec. 469(c)(2),

(4).       Both parties agree that petitioner’s equipment leasing

activity is a rental activity and that the income from the

activity is therefore passive, unless petitioner qualifies under

one of six exceptions listed in the regulations.        See Welch v.

Commissioner, T.C. Memo. 1998-310; sec. 1.469-1T(e)(3)(ii)(A)

through (F), Temporary Income Tax Regs., 53 Fed. Reg. 5702 (Feb.

25, 1988).9      The exception relevant here is the incidental


       9
      The Commissioner is given authority under sec. 469(l) to
prescribe regulations to carry out the provisions of the section.
As relevant here, this statutory authority was carried out in
sec. 1.469-1T, Temporary Income Tax Regs., 53 Fed. Reg. 5701
(Feb. 25, 1988), sec. 1.469-5T, Temporary Income Tax Regs., 53
Fed. Reg. 5725 (Feb. 25, 1988), and sec. 1.469-9, Income Tax
                                                   (continued...)
                                - 15 -

activity exception, and we now address whether this exception

applies to petitioner’s equipment leasing activity.

     A.      Whether Petitioner Qualifies for the Incidental
             Activity Exception

        An activity involving the use of tangible property is not

considered a rental activity if the rental is “incidental” to a

nonrental activity of the taxpayer.      Sec. 1.469-1T(e)(3)(ii)(D),

Temporary Income Tax Regs., supra.       Before we discuss whether

petitioner meets the incidental activity exception, however, we

must determine whether the law firm activity, conducted through a

C corporation, can be classified as an activity of the petitioner

for purposes of the incidental activity exception.

        1.   Whether Petitioner’s Activities Include Those
             Conducted Through His C Corporation

     A taxpayer’s activities include those conducted through C

corporations that are subject to the passive loss rules of

section 469.     Sec. 1.469-4(a), Income Tax Regs.   C corporations

subject to section 469 include closely held C corporations, which

are corporations where at least half the stock is owned by no

more than five individuals.     Secs. 469(a)(2)(B), (j)(1),

465(a)(1)(B), 542(a)(2).     Because petitioner owned 100 percent of

the stock in the law firm, his professional corporation,

petitioner’s activities included his C corporation activities.



     9
        (...continued)
Regs.    See also sec. 7805.
                               - 16 -

See also Schwalbach v. Commissioner, 111 T.C. 215, 225-226

(1998).

     2.    Whether Petitioner Meets the Incidental Activity
           Exception Conditions

     To qualify for the incidental activity exception by having a

rental of property treated as incidental to a trade or business

activity, a taxpayer must meet three conditions.     See sec. 1.469-

1(T)(e)(3)(vi)(C)(1)-(3), Temporary Income Tax Regs., 53 Fed.

Reg. 5703 (Feb. 25, 1988).   First, the taxpayer must own an

interest in the trade or business.      Second, the property at issue

must predominantly be used in the trade or business during the

taxable year or during at least 2 of the 5 immediately preceding

taxable years.    Third, the gross rental income from the property

for the taxable year must be less than 2 percent of the lesser of

(i) the unadjusted basis of the property and (ii) the fair market

value of such property.    Petitioner meets these requirements.

     Petitioner owns an interest in the law firm as its exclusive

owner.    On the basis of the evidence, the equipment leased to the

law firm was integral to the operation of the law firm.     The

equipment was crucial in petitioner presenting his cases, and

petitioner’s particular skill with the equipment increased his

renown in the class-action field.    Finally, the parties do not

dispute that petitioner’s gross rental income from the equipment

leasing activity met the percentage requirement, because

petitioner received no rental income during the years at issue.
                               - 17 -

Petitioner therefore qualifies for the incidental rental

exception.    See Tarakci v. Commissioner, T.C. Memo. 2000-358.    We

now address one additional argument by respondent.

     3.     Whether Petitioner May Simultaneously Use the Equipment
            in His Trade or Business and the Rental Activity

     Respondent also argues that the incidental activity

exception does not apply here because the exception requires

petitioner to temporarily stop using the property in his trade or

business before using it in a rental activity.    In essence,

respondent claims that the exception is not available when the

property is used in the leasing activity and the law firm

“simultaneously” and advances two main arguments in support of

that claim.

     First, respondent argues that the regulation uses the past

tense when referring to the use of the property in the trade or

business.    See sec. 1.469-1T(e)(3)(vi)(C)(2), Temporary Income

Tax Regs., supra.    Respondent focuses on the word “was” in the

regulation to argue that the leased property cannot be used in a

rental and a nonrental activity simultaneously.    We disagree.

     We note that the word “was” in the regulation refers not

only to past years but also to the current taxable year.    See

Philips Petroleum Co. v. Commissioner, 101 T.C. 78, 107 (1993)

(we apply a regulation according to its plain or ordinary

meaning), affd. without published opinion 70 F.3d 1282 (10th Cir.

1995).    The incidental activity regulation requires, among other
                              - 18 -

things, that “[t]he property was predominantly used in such trade

or business activity during the taxable year.”   Id. (emphasis

added).   The equipment therefore may be used in petitioner’s law

firm at any time in the taxable year under the incidental

activity exception.

     Second, respondent argues that the preamble to the Treasury

Decision in which the incidental activity exception was

promulgated also supports his argument that the property must be

used in the taxpayer’s trade or business before its use in the

taxpayer’s rental activity.   See T.D. 8175, 1988-1 C.B. 191.    The

preamble states specifically that the exception applies if “an

insubstantial amount of rental income is derived from property

that was recently used in a trade or business activity of the

taxpayer and is temporarily rented.”   Id., 1988-1 C.B. at 193.

     While the preamble does refer to the use of the property in

the trade or business activity in the past tense and the use of

the property in the rental activity in the present tense, we

believe the preamble merely exemplifies a situation that would

satisfy the incidental activity exception.   The preamble does not

bar situations where the property is being used in both

activities at once.   Consequently, petitioner may use the

equipment in the law firm concurrently with using it in the

rental activity.   See Tarakci v. Commissioner, supra.
                                - 19 -

     4.     Conclusion

     Because petitioner has satisfied the incidental activity

exception elements, he is entitled to treat his equipment leasing

activity as incidental to the law firm’s trade or business

activity.    Petitioner’s leasing activity, therefore, is a

nonrental activity.

     B.     Material Participation

     Finally, petitioner must also carry his burden to prove that

he materially participated in the activity to qualify the losses

as nonpassive.    See sec. 469(c)(1); Welch v. Commissioner, T.C.

Memo. 1998-310.     A taxpayer is treated as materially

participating in an activity only if the taxpayer is involved in

the activity on a basis which is regular, continuous, and

substantial.    See sec. 469(h)(1).

     A taxpayer may satisfy the material participation

requirement if the taxpayer satisfies any one of seven safe

harbor tests.    See sec. 1.469-5T(a), Temporary Income Tax Regs.,

53 Fed. Reg. 5725 (Feb. 25, 1988); see also Lapid v.

Commissioner, T.C. Memo. 2004-222 (citing Mordkin v.

Commissioner, T.C. Memo. 1996-187, which upheld the regulatory

“safe harbor” tests letting taxpayers prove material

participation by showing they spent a certain number of hours on

an activity).     One test is particularly relevant here.
                               - 20 -

     An individual may be treated as materially participating in

an activity if his or her participation in that activity during

the taxable year constitutes substantially all of the

participation10 in the activity for that year.    Sec. 1.469-

5T(a)(2), Temporary Income Tax Regs., supra.     Because petitioner

exclusively engaged in and managed the leasing activity, he meets

this safe harbor test and thus satisfies the material

participation standard.    We therefore find that petitioner has

satisfied his burden of showing that he materially participated

in the activity and was involved in the leasing activity on a

regular, continuous, and substantial basis.    See sec. 469(c)(1),

(h)(1); sec. 1.469-5T(a)(2), (7), Temporary Income Tax Regs.,

supra.

III. Conclusion

     Because we have found that respondent failed to meet his

burden to show petitioner did not engage in the equipment leasing

activity for profit, petitioner’s losses are not limited by

section 183.   We have also found that petitioner’s equipment

leasing activity was a nonrental activity in which petitioner

materially participated.    Petitioner’s losses, therefore, are not

limited by the passive activity rules of section 469, and




     10
      “Participation” generally means any work done in an
activity by an individual who owns an interest in the activity.
Sec. 1.469-5(f)(1), Income Tax Regs.
                             - 21 -

petitioner may net his equipment leasing activity losses in the

years at issue with the law firm income.

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing,


                                           Decision will be entered

                                      for petitioners.
