111 T.C. No. 9
UNITED STATES TAX COURT
STEPHEN AND ANN SCHWALBACH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17502-97. Filed September 8, 1998.
Ps rented a building to a personal service
corporation for use in a business activity in which P
materially participated. On Ps' 1994 Federal income
tax return, Ps offset the rental income with unrelated
passive losses. Relying on secs. 1.469-2(f)(6) and
1.469-4(a), Income Tax Regs., R determined that Ps
could not offset the rental income with the passive
losses because the rental income was recharacterized as
nonpassive income. Ps argue that sec. 1.469-2(f)(6),
Income Tax Regs., is invalid as applied to them because
the meaning of the word "activity" as used therein does
not include attributing a C corporation's activity to a
material participant in that activity without reference
to sec. 1.469-4(a), Income Tax Regs., which, Ps argue,
is invalid because R prescribed the rules of that
section without complying with the notice and comment
requirements of the Administrative Procedure Act (APA),
5 U.S.C. sec. 553(b) and (c) (1994).
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