Char-Lil Corporation - Page 29

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             includable in adjusted income from rents as defined by                   
             section 543(b)(3).  That is, petitioner contends that the                
             subject interest income was paid on debts that represent                 
             the price for which real property held primarily for sale                
             to customers in the ordinary course of its trade or                      
             business was sold or exchanged.                                          
                  Respondent argues that petitioner is not in the                     
             business of selling real estate.  Therefore, according                   
             to respondent, the subject interest income received from                 
             the installment sale of real estate is portfolio income                  
             that is not taken into account in computing the net income               
             or loss from petitioner's rental activity, pursuant to                   
             section 469(e)(1)(A)(i)(I).  Respondent points out that                  
             gains from the sale or exchange of passive activity                      
             property is properly includable in computing income or loss              
             from a passive activity but that "interest received as                   
             installment sales of real estate represents portfolio                    
             income, which is nonpassive."  In support, respondent cites              
             section 1.469-2T(c)(3)(iv), Example (1), Temporary Income                
             Tax Regs., 53 Fed. Reg. 5714 (Feb. 25, 1988), which states               
             as follows:                                                              

                       Example (1).  A, an individual engaged in                      
                  the trade or business of farming, disposes of                       
                  farmland in an installment sale.  A is not                          
                  engaged in a trade or business of selling                           
                  farmland.  Therefore, A's interest income from                      




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