Char-Lil Corporation - Page 23

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             gross income and not been treated as personal holding                    
             company subject to personal holding company tax."                        
             According to petitioner, respondent is seeking to impose                 
             personal holding company tax on petitioner because                       
             "petitioner changed the nature of this income from rental                
             income to interest income by selling the property to its                 
             rental customers and other customers".  Petitioner contends              
             that this case "is exactly the reason that Congress                      
             provided in I.R.C. � 543(b)(3) that interest income which                
             is derived from mortgages from the sale of property in the               
             ordinary course of business be treated as rental income for              
             the purpose of determining whether rents qualify as                      
             personal holding company income."                                        
                  Respondent argues that the subject properties were                  
             held primarily for rental and investment and were not held               
             primarily for sale to customers.  Respondent points out                  
             that there is no evidence that the properties were actively              
             marketed for sale.  To the contrary, except in several                   
             instances when petitioner listed a property with a real                  
             estate agent, it held the properties for rental but would                
             sell a property if it received an acceptable offer.                      
             Respondent notes that petitioner claimed depreciation                    
             deductions with respect to each of the subject properties                
             and reported the gains from the sale of all of its                       
             properties in a manner that is inconsistent with its                     



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Last modified: May 25, 2011