Stephen and Ann Schwalbach - Page 1

                                   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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