Rev. Rul. 65-40

Advice has been requested whether amounts received by a corporation from leasing personal property, under the circumstances described below, are `rents' within the meaning of section 1372(e)(5) of the Internal Revenue Code of 1954.

M corporation derives all of its income from leasing motor vehicles on a daily basis, ordinarily not exceeding 1 week. As part of its leasing operation, M is obligated to place and keep the vehicles in operable condition. It furnishes gas and oil, tire repair and changing, cleaning and polishing, oil changing and lubrication, and engine and body repair. M performs some of these servicing operations through its own employees and others through independent service stations, automobile dealerships, or repair shops.

Section 1372(a) of the Code allows a small business corporation, as defined in section 1371 of the Code, to elect not to be subject to the taxes imposed by chapter 1 of subtitle A of the Code, but to have all its income taxed directly to its shareholders. However, this election is terminated under the provisions of section 1372(e)(5) of the Code 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 if significant services are rendered in connection with such payments.

The services performed in connection with the automobile leasing business described above were rendered in the active operation of a business and constitute `significant services' within the meaning of section 1.1372-4(b)(5)(iv) of the regulations.

Accordingly, it is held that the amounts received under the circumstances described above are not `rents' within the meaning of section 1372(e)(5) of the Code.