139 T.C. 396
T.C.2012Background
- Petitioners and ICE engaged in tower and land rentals to ICE through petitioner and nominee trusts, with ICE using some towers in its SMR business and leasing space to third parties.
- ICE reported its income as ordinary business income; petitioners reported their distributive share as ordinary income on Schedule K-1 and Schedule E.
- Respondent recharacterized profitable rental income from passive to non-passive under the self-rental rule (section 1.469-2(f)(6)) but did not recharacterize unprofitable rentals.
- Respondent also proposed recharacterizing land-only rentals under the 30% depreciation-based test in section 1.469-2T(f)(3).
- The court concluded ICE’s tower rentals to third parties were rental activities, not trade or business activities, so section 1.469-2(f)(6) does not apply; land-only rentals are subject to 30% test and non-passive treatment.
- The court ultimately entered the decision under Rule 155, disposing of the self-rental issue and applying the 30% test to land-only rentals.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether self-rental recharacterization applies to tower/land rentals | Dirico/ petitioners: ICE rental activity is rental, not trade/business; self-rental rule inapplicable | Respondent: ICE rental activity constitutes a trade/business; self-rental rule applies to profitable rentals | Self-rental rule does not apply; rentals were not used in a trade/business by ICE |
| Whether grouping of ICE activities allows cross-offsets | Grouping improper; cannot treat rental separately from ICE’s trade/business | ICE grouping forms an appropriate economic unit; allows cross-offsets | Grouping did not justify applying self-rental; petitioner’s rentals not grouped for self-rental |
| Whether land-only rentals fall under 30% test for nonpassive treatment | 30% test not properly applied to land-only rentals; arguments untimely | 30% test properly applied to land-only rentals; land is nondepreciable | Land-only rentals are non-passive under 30% test; petitioners’ income from them non-passive |
| Whether separate treatment of profitable vs unprofitable rentals is proper | All ICE rentals constitute single activity; profits and losses should be treated consistently | Profitable and unprofitable rentals can be treated separately under 469 grouping rules | No change to losses; losses remain passive while profits considered under applicable rules |
Key Cases Cited
- Veriha v. Commissioner, 139 T.C. 45 (2012) (discusses self-rental nonoffset of passive losses by non-passive income)
- Carlos v. Commissioner, 123 T.C. 275 (2004) (self-rental rule recharacterizes income from an item of property)
- Ware v. Commissioner, 92 T.C. 1267 (1989) (surprise and timing considerations in applying 469 tests)
- Seligman v. Commissioner, 84 T.C. 191 (1985) (timeliness of issues and application of 30% test distinguished)
- Krukowski v. Commissioner, 279 F.3d 547 (7th Cir. 2002) (validity of 1.469-2 self-rental principles; appellate affirmation)
- Sidell v. Commissioner, 225 F.3d 103 (1st Cir. 2000) (upholds 469-related recharacterization theories)
- Fransen v. United States, 191 F.3d 599 (5th Cir. 1999) (upholds 469 self-rental constructs)