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Falls. Petitioners also reported on this schedule that they had
realized a $10,148 passive loss on an investment in an S
corporation named Golfview Heights, Inc., and that they had
realized a $6,297 passive loss on an investment in a partnership
named South Main Dental Partners. Petitioners took into account
all these items of income and loss, the effect of which was that
they reported net passthrough and rental income of $33,318
($50,556 + ($10,148) + ($6,297) + ($1,670) + $877).
Respondent determined that the three losses aggregating
$18,115 (($10,148) + ($6,297) + ($1,670)) could offset only the
$877 gain, resulting in an adjustment (increase) in income of
$17,238. According to the notice of deficiency:
On Schedule E, Part I of your 1994 return, in regards
to property B [i.e., the River Falls building], you
reported a net profit of $50,556. This property is
related to your corporation for which you are a
material participant. You further offset passive
losses of $16,445 from other companies shown on
Schedule E, Part II against the non-passive income from
related property B. Internal Revenue Code section 469
changes the net income from the related rental property
B from non-passive to passive income.[1]
Further, on Schedule E, Part V of your 1994 return,
your total net profit that you reported on your return
was $33,318. However, it has been determined that your
total net profit on Schedule E is $50,556. Your
increase in net profit of $17,238 is based on the
unallowable loss of $17,238 * * * as summarized below.
1 Actually, the regulations under sec. 469 change the net
income from the rental property from passive to nonpassive
income. Based on our reading of the entire notice of deficiency,
we conclude that respondent's mischaracterization in the notice
of deficiency is merely a typographical error.
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