Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 65-83

1965-1 C.B. 430

Sec. 1372

IRS Headnote

Examples of payments  received by a corporation for the use of personal property which, under the circumstances, do not constitute rents within the meaning of section 1372(e)(5) of the Internal Revenue Code of 1954 because significant services are rendered by the corporation in connection with such payments.

Full Text

Rev. Rul. 65-83

Advice has been requested whether payments received by a corporation for the use of personal property in particular circumstances constitute rents within the meaning of section 1372(e)(5) of the Internal Revenue Code of 1954.

Four corporations are in the business of leasing personal property under the circumstances described below. Each corporation is a small business corporation which has elected, pursuant to section 1372(a) of the Code, not to be subject to a corporate income tax, but to have all its income taxed directly to its shareholders.

(1) R Corporation derives all of its income from leasing barricades for use around areas of construction and danger areas and for traffic control purposes. Each barricade consists of a steel frame, a sign board and a flashing light. R delivers the barricades to the job site, and services them twice weekly, replacing batteries, bulbs, and lenses as well as parts stolen or broken, and picking up the barricades upon completion of the project.

(2) S Corporation leases golf carts at various golf courses in its area at a charge which is based on the number of rounds of golf for which they are used. The payment received is divided with the owner of the course involved, whose employees handle the actual rental of the carts to the golfers. The costs of maintaining and servicing the carts, including the wages of a full-time mechanic, are paid by S .

(3) The income of T Corporation is derived from charges made for the use of its crane. The charges are usually made on an hourly, daily, weekly or monthly basis, although, occasionally, an agreed amount is paid for a particular job. The operator is furnished and paid by T .

(4) U Corporation is a men's clothing store. In addition to selling clothes, it rents dress suits to individuals. No charges are made for alterations and each suit is cleaned and pressed before it is used by a customer.

Section 1372(e)(5) of the Code provides that the election made under section 1372(a) of the Code shall terminate if, for any taxable year of the corporation for which the election is in effect, more than 20 percent of the gross receipts of the corporation is derived from rents and certain other types of income.

Section 1.1372-4(b)(5)(iv) of the Income Tax Regulations excludes from the term `rents,' as used in section 1372(e)(5) of the Code, payments for the use of personal property where significant services are rendered in connection with such payments.

Accordingly, it is held that the payments received by the corporations for the use of personal property in each of the above situations do not constitute rents within the meaning of section 1372(e)(5) of the Code since, in each instance, significant services are performed by the corporation in connection with such payments.