The Tax Court has applied the “self-rental rule” to recharacterize the income that the taxpayer-owner of a trucking company received from a separate leasing company that he owned as nonpassive income.  Therefore, it couldn’t be netted against the passive loss generated by another leasing company owned by the taxpayer.

Joseph Veriha was the sole owner of JVT, a C corporation, which was engaged in the trucking business and leased its tractors and trailers from two separate entities, TRI and JRV Leasing. During 2005, TRI, an S corporation, generated net income and JRV, an LLC, generated a net loss.  

Generally, passive activity losses are not allowed: They are suspended until the taxpayer either has offsetting passive income or disposes of their entire interest in the passive. Veriha treated the net income from TRI as passive income and treated the net loss from JRV as a passive loss, allowing him to offset the passive losses on his return with the passive income.

In a ruling last week, the court concluded that Reg. Sec. 1.469-2(f)(6), (the self-rental rule) required that the rental income received by Veriha from TRI be treated as non-passive income, and therefore that it could not be used to offset the passive activity loss of JRV.

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