45

JOSEPH VERIHA AND CHRISTINA F. VERIHA, PETITIONERS v. 

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 7099–10. Filed August 8, 2012. 

During 2005, P–H was the sole owner of JVT, a C corporation in the trucking business, and he actively participated in 

JVT’s business. JVT leased the tractors and trailers used in 

its business from TRI, an S corporation in which P–H owned 

99% of the shares of stock, and JRV, a single-member LLC in 

which P–H was the only member. The lease of each tractor 

and each trailer was governed by a separate contract. During 

2005, TRI generated net income and JRV generated a net 

loss. On their 2005 joint return Ps treated the net income 

from TRI as passive income and treated the net loss from JRV 

as a passive loss. R determined that, pursuant to sec. 1.469– 

2(f)(6), Income Tax Regs. (sometimes referred to as the ‘‘selfrental rule or the recharacterization rule’’), each tractor and 

each trailer should be considered a separate ‘‘item of property’’ 

and that the income P–H received from TRI should be recharacterized as nonpassive income. Ps contend that the 

entire collection of tractors and trailers is one ‘‘item of property’’. Held: For purposes of sec. 1.469–2(f)(6), Income Tax 

Regs., each individual tractor or trailer was an ‘‘item of property’’ and the income P–H received from TRI was subject to 

recharacterization. 

Amy L. Barnes and Robert Edward Dallman, for petitioners. 

Laurie B. Downs, for respondent. 

46 139 UNITED STATES TAX COURT REPORTS (45) 

1 Unless otherwise indicated, section references are to the Internal Revenue Code of 1986 

(Code), as amended, and Rule references are to the Tax Court Rules of Practice and Procedure. 

OPINION 

WELLS, Judge: Respondent determined a deficiency in petitioners’ 2005 Federal income tax of $258,785 and an 

accuracy-related penalty pursuant to section 6662(a) of 

$51,757. 1 Respondent concedes that petitioners are not liable 

for the penalty. The issue we must decide is whether the 

income petitioner Joseph Veriha received from an S corporation in which he owned 99% of the stock should be recharacterized as nonpassive income pursuant to section 

1.469–2(f)(6), Income Tax Regs. (sometimes referred to as the 

‘‘self-rental rule or the recharacterization rule’’). 

Background 

The parties submitted the instant case fully stipulated, 

without trial, pursuant to Rule 122. The parties’ stipulations 

of fact are hereby incorporated by reference and are found 

accordingly. Petitioners are husband and wife who resided in 

Wisconsin at the time they filed their petition. 

Mr. Veriha is the sole owner of John Veriha Trucking, Inc. 

(JVT), a corporation with its principal place of business in 

Wisconsin. JVT was a C corporation during 2005 but has 

since elected S corporation status. Petitioners were both 

employed by JVT during 2005, and Mr. Veriha materially 

participated in JVT’s business. JVT is a trucking company that 

leases its trucking equipment from two different entities, 

Transportation Resources, Inc. (TRI), and JRV Leasing, LLC

(JRV). The trucking equipment JVT leases consists of two 

parts: a motorized vehicle (tractor) and a towed storage 

trailer (trailer). 

TRI is an S corporation in which Mr. Veriha owns 99% of 

the stock; his father owns the remaining 1%. TRI is an equipment leasing company with its principal place of business in 

Wisconsin. TRI owns only the tractors and trailers that it 

leases to JVT. During 2005, TRI and JVT entered into 125 

separate lease agreements, one for each tractor or trailer 

leased. TRI’s only source of income during 2005 was the 

leasing agreements with JVT. 

JRV is a single-member limited liability company, and Mr. 

Veriha is its sole member. JRV is an equipment leasing comVerDate Nov 24 2008 09:51 Jun 05, 2014 Jkt 372897 PO 20012 Frm 00002 Fmt 2847 Sfmt 2847 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\VERIHA.AUG JAMIE
(45) VERIHA v. COMMISSIONER 47

pany that owns only the tractors and trailers that it leases 

to JVT. During 2005, JRV and JVT entered into 66 separate 

lease agreements, one for each tractor or trailer leased. JRV’s 

only source of income during 2005 was the leasing agreements with JVT. 

Each tractor was leased to JVT as one unit, and each 

trailer was leased to JVT as one unit. The monthly rate for 

leasing each tractor was determined by the tractor’s age, and 

the monthly rate for leasing each trailer was determined by 

the type of trailer. During 2005, the tractors and trailers 

owned by TRI and JRV were all parked in the same lot and 

were intermingled. All the tractors were painted the same 

yellow color, and all received the same scheduled maintenance. JVT paid the expenses for all of the tractors and 

trailers and insured all the tractors and trailers under the 

same blanket insurance policy. In determining which tractor 

or trailer to use on a route, JVT made no distinction between 

those TRI owned and those JRV owned. Similarly, when it 

assigned drivers, JVT did not make any distinction on the 

basis of the ownership of the tractor or trailer. 

During 2005, TRI generated net income, which it reported 

to Mr. Veriha on a Schedule K–1, Partner’s Share of Income, 

Deductions, Credits, etc. Petitioners treated that net income 

as passive income on their return. 

During 2005, JRV generated a net loss, which petitioners 

reported on their Schedule C, Profit or Loss From Business. 

Petitioners treated that loss as a passive loss on their return. 

Respondent issued a notice of deficiency to petitioners in 

which respondent determined that petitioners’ income from 

TRI should be recharacterized as nonpassive income pursuant 

to section 1.469–2(f)(6), Income Tax Regs. Petitioners timely 

filed their petition in this Court. 

Discussion 

Section 469(a) disallows the passive activity loss of an individual taxpayer. Passive activity losses are suspended until 

the taxpayer either has offsetting passive income or disposes 

of the taxpayer’s entire interest in the passive activity. Sec. 

469(b), (g). Congress enacted the passive activity rules in 

response to concern about the widespread use of tax shelters 

48 139 UNITED STATES TAX COURT REPORTS (45) 

in which taxpayers were avoiding tax on unrelated income. 

See Schaefer v. Commissioner, 105 T.C. 227, 230 (1995). 

The Code defines ‘‘passive activity’’ as an activity involving 

the conduct of a trade or business in which the taxpayer does 

not materially participate. Sec. 469(c)(1). However, the term 

‘‘passive activity’’ generally includes any rental activity, 

regardless of material participation. Sec. 469(c)(2), (4). Section 469 does not define ‘‘activity’’. See Schwalbach v. 

Commissioner, 111 T.C. 215, 223 (1998). However, the Secretary has prescribed regulations pursuant to section 469(l) 

that specify what constitutes an ‘‘activity’’. Section 1.469– 

4(c), Income Tax Regs., sets forth rules for grouping activities 

together to determine what constitutes a single ‘‘activity’’. 

That regulation provides: ‘‘One or more trade or business 

activities or rental activities may be treated as a single 

activity if the activities constitute an appropriate economic 

unit for the measurement of gain or loss for purposes of section 469.’’ Sec. 1.469–4(c)(1), Income Tax Regs. Whether 

activities constitute an ‘‘appropriate economic unit’’ depends 

on the facts and circumstances. Sec. 1.469–4(c)(2), Income 

Tax Regs. 

Section 469(d)(1) defines ‘‘passive activity loss’’ as ‘‘the 

amount (if any) by which—(A) the aggregate losses from all 

passive activities for the taxable year, exceed (B) the aggregate income from all passive activities for such year.’’ A passive activity loss is computed by first netting items of income 

and loss within each passive activity and then subtracting 

aggregate income from all passive activities from aggregate 

losses from all passive activities. See id.; sec. 1.469–2T, Temporary Income Tax Regs., 53 Fed. Reg. 5686 (Feb. 25, 1988). 

In carrying out the provisions of section 469, section 

469(l)(2) authorizes the Secretary to promulgate regulations 

‘‘which provide that certain items of gross income will not be 

taken into account in determining income or loss from any 

activity (and the treatment of expenses allocable to such 

income)’’. While the general rule of section 469(c)(2) 

characterizes all rental activity as passive, section 1.469– 

2(f)(6), Income Tax Regs., requires net rental income received 

by the taxpayer for use of an item of the taxpayer’s property 

in a business in which the taxpayer materially participates 

to be treated as income not from a passive activity, and provides: 

(45) VERIHA v. COMMISSIONER 49

(f)(6) Property rented to a nonpassive activity.—An amount of the taxpayer’s gross rental activity income for the taxable year from an item of 

property equal to the net rental activity income for the year from that item 

of property is treated as not from a passive activity if the property— 

(i) Is rented for use in a trade or business activity * * * in which the 

taxpayer materially participates * * *. 

A taxpayer’s activities include activities conducted through C 

corporations that are subject to section 469. Sec. 1.469–4(a), 

Income Tax Regs. 

Section 1.469–2(f)(6), Income Tax Regs., explicitly recharacterizes as nonpassive net rental activity income from 

an ‘‘item of property’’ rather than net income from the entire 

rental ‘‘activity’’. Section 469 and the regulations thereunder 

distinguish between net income from an ‘‘item of property’’ 

and net income from the entire ‘‘activity’’, which might 

include rental income from multiple items of property. Even 

when items of property are grouped together in one activity, 

section 1.469–2(f)(6), Income Tax Regs., still applies to recharacterize rental income from an item of property as nonpassive income. Carlos v. Commissioner, 123 T.C. 275, 282 

(2004). 

The parties disagree about the definition of the phrase 

‘‘item of property’’. In the notice of deficiency, respondent 

determined that the income from TRI should be recharacterized as nonpassive income. The notice of deficiency does not 

explain the rationale for that recharacterization, and petitioners contend that the notice of deficiency determined that 

each fleet of tractors and trailers TRI and JRV owned was a 

separate ‘‘item of property’’ and that the income from TRI

should be recharacterized pursuant to section 1.469–2(f)(6), 

Income Tax Regs. However, on brief respondent contends 

that the notice of deficiency determined that each individual 

tractor or trailer is an ‘‘item of property’’ but that respondent 

elected not to challenge the offsetting of income and losses 

with respect to each tractor or trailer within TRI or JRV. In 

contrast, petitioners contend that the entire collection of tractors and trailers, i.e., all the tractors and trailers whether 

owned by TRI or JRV, constitutes a single ‘‘item of property’’. 

Because neither the Code nor the regulations define the 

phrase ‘‘item of property’’, we follow the established rule of 

construction that an undefined term is given its ordinary 

meaning. See FDIC v. Meyer, 510 U.S. 471, 476 (1994); Gates 

50 139 UNITED STATES TAX COURT REPORTS (45) 

v. Commissioner, 135 T.C. 1, 6 (2010). When seeking to 

ascertain the ordinary meaning of a term, a court may look 

for assistance to sources such as dictionaries. Muscarello v. 

United States, 524 U.S. 125, 127–132 (1998); Gates v. 

Commissioner, 135 T.C. at 6. 

Webster’s Third New International Dictionary 1203 (2002) 

provides the following definitions of the term ‘‘item’’: ‘‘an 

individual thing (as an article of household goods, an article 

of apparel, an object in an art collection, a book in a library) 

singled out from an aggregate of the individual things * * * 

item applies chiefly to each thing in a list of things or in a 

group of things that lend themselves to listing (an item in a 

laundry list) (each item of income) (an item in an inventory).’’ 

Webster’s Ninth New Collegiate Dictionary 643 (1990) similarly defines ‘‘item’’ as ‘‘a separate particular in an enumeration, account, or series’’. The American Heritage Dictionary 

of the English Language 930 (2000) defines ‘‘item’’ as ‘‘[a] 

single article or unit in a collection, enumeration, or series.’’ 

Black’s Law Dictionary 908 (2009) defines ‘‘item’’ as ‘‘[a] piece 

of a whole’’. In all of the foregoing dictionary definitions 

‘‘item’’ is defined as a separate thing that is part of a larger 

collection. Those definitions support respondent’s contention 

that each separate tractor or trailer is an ‘‘item of property’’. 

Indeed, the articulation of petitioners’ argument requires the 

use of a term such as ‘‘collection’’, ‘‘group’’, or ‘‘whole’’, all of 

which serve to distinguish the collection of tractors and 

trailers from any single tractor or trailer, i.e., any single 

‘‘item of property’’. Accordingly, we conclude that each individual tractor or trailer is an ‘‘item of property’’ within the 

meaning of section 1.469–2(f)(6), Income Tax Regs. 

However, as one court has noted, the definition of the term 

‘‘item’’ is context specific: 

[T]he dictionary definition * * * is of little value because ‘‘items’’ is a relative term whose contours are constructed by context. Only when measured by the remaining particulars in a given classification can one discern 

whether a designation is an item. Thus, we are left * * * with determining the meaning of ‘‘items’’ as used in the statute without an accompanying list of associated particulars. That being so, reasonable persons 

could differ on the degree of specificity inherent in the term. [United States 

v. Zheng, 768 F.2d 518, 523 (3d Cir. 1985).] 

Although we conclude that each tractor and each trailer is a 

separate item of property, we can conceive of cases in which 

(45) VERIHA v. COMMISSIONER 51

the result would be different. For example, if JVT had always 

used each tractor with one particular trailer and if the lease 

agreements between JVT and TRI and JRV were for particular 

tractor-trailer pairs, then each tractor-trailer combination 

might be considered an ‘‘item of property’’. 

Petitioners contend that accepting respondent’s argument 

that each tractor and each trailer is an ‘‘item of property’’ 

would compel absurd results such as, for example, that a 

business renting tools would have to recharacterize income 

with respect to each individual tool. However, that would not 

necessarily be the case; rather, it would be the case only if 

the context suggested that each tool should be considered an 

‘‘item of property’’. If, for instance, the business leased tool 

sets and only tool sets, then each set might be considered an 

‘‘item of property’’. If, on the other hand, as in the instant 

case, the lease of each tool were governed by a separate lease 

agreement with a separate price, then we would not consider 

absurd the result that the business would have to recharacterize income on that basis. 

Petitioners contend that respondent’s position is at odds 

with that taken by the Commissioner in Shaw v. Commissioner, T.C. Memo. 2002–35, in which the Commissioner 

reclassified as nonpassive the net rental income from various 

properties, including ‘‘over the road trailers’’. In Shaw, for 

purposes of section 1.469–2(f)(6), Income Tax Regs., the 

Commissioner treated all of the over the road trailers as one 

item of property. We are not persuaded by petitioners’ 

contention. We have repeatedly held that, even with respect 

to the same taxpayer, the Commissioner is not bound in any 

given year to allow the same treatment as in prior years. See, 

e.g., Pekar v. Commissioner, 113 T.C. 158, 166 (1999); 

Murphy v. Commissioner, 92 T.C. 12, 15 (1989); Lee v. 

Commissioner, T.C. Memo. 2006–70. As we stated in Murphy 

v. Commissioner, 92 T.C. at 15: ‘‘The erroneous past actions 

of respondent cannot be relied upon to allow * * * [the treatment of an item] not permitted by statute.’’ Certainly, the 

same would be true as to different taxpayers. Accordingly, we 

conclude that respondent is not bound to treat petitioners’ 

tractors and trailers as one item of property even though the 

Commissioner may have treated the over-the-road trailers in 

Shaw as one item of property. Moreover, it is not even clear 

that, in Shaw, the Commissioner actually treated all of the 

52 139 UNITED STATES TAX COURT REPORTS (45) 

2We note that this result is necessarily more favorable to petitioners than the result would 

have been had respondent contended that it was necessary for the income from each tractor or 

trailer within TRI and JRV to be recharacterized as nonpassive. 

over-the-road trailers as one item of property. Indeed, the 

Commissioner’s treatment of the trailers in Shaw is consistent with respondent’s position in his brief that, although 

respondent considers each individual tractor or trailer a 

separate item of property, respondent is electing not to challenge petitioners’ offset of the income and losses from each 

item of property within TRI and JRV. 

Petitioners further contend that, within the trucking 

industry, the phrase ‘‘item of property’’ typically refers to an 

entire fleet of trucks. However, petitioners cite no authority 

for that proposition, and we find it implausible. Indeed, even 

within the context of the instant case, Mr. Veriha’s decision 

to hold the entire fleet of tractors and trailers under the title 

of two different entities is inconsistent with the proposition 

that the entire fleet is viewed as a single ‘‘item of property’’. 

Moreover, that proposition is also inconsistent with the fact 

that JVT entered into a separate lease agreement with TRI or 

JRV for each tractor and each trailer it leased. Indeed, those 

separate lease agreements strongly suggest that JVT, TRI, and 

JRV viewed each of the tractors or trailers as a separate 

‘‘item of property’’. 

As we stated in Shaw v. Commissioner, T.C. Memo. 2002– 

35, a taxpayer ‘‘must accept the tax consequences of his business decisions and the manner in which he chose to structure 

his business transactions.’’ Or, as the Supreme Court has 

stated: ‘‘[W]hile a taxpayer is free to organize his affairs as 

he chooses, nevertheless, once having done so, he must 

accept the tax consequences of his choice, whether contemplated or not, and may not enjoy the benefit of some 

other route he might have chosen to follow but did not.’’ 

Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co., 

417 U.S. 134, 149 (1974) (internal citations omitted). 

On the basis of the foregoing, we conclude that each individual tractor and each trailer was a separate ‘‘item of property’’ within the meaning of section 1.469–2(f)(6), Income Tax 

Regs. However, because respondent has not contested petitioners’ netting of gains and losses within TRI, only TRI’s net 

income is recharacterized as nonpassive income. 2

(45) VERIHA v. COMMISSIONER 53

In reaching these holdings, we have considered all the parties’ arguments, and, to the extent not addressed herein, we 

conclude that they are moot, irrelevant, or without merit. 

To reflect the foregoing, 

Decision will be entered under Rule 155. 

f