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section 469, including regulations requiring net income or gain
from a limited partnership or other passive activity to be treated
as not from a passive activity. See sec. 469(l)(3). Continuing,
respondent posits that pursuant to that authority, the Secretary
properly promulgated the self-rented property rule, which
recharacterizes rental income as nonpassive (or active) income when
a taxpayer rents property to an activity in which the taxpayer
materially participates.
Petitioners challenge respondent's determinations, making
three arguments. First, petitioners assert that section 1.469-
2(f)(6), Income Tax Regs., is invalid insofar as it recharacterizes
rental income received from a C corporation from passive to
nonpassive (hereinafter this argument is referred to as
petitioners' validity argument). Petitioners maintain that in
order for the self-rented property rule to apply, (1) the property
must be rented for use in a trade or business activity in which the
taxpayer materially participates, and (2) the activities of a C
corporation cannot be attributed to a taxpayer/shareholder in
determining whether that taxpayer has materially participated in
the corporation's business activity. According to petitioners,
application of section 1.469-2(f)(6), Income Tax Regs., to a C
corporation is contrary to the plain language, origin, and purpose
of the passive activity rules.
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