Stephen and Ann Schwalbach - Page 6

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          basis in this company in order to claim this loss."  Petitioners            
          concede that they may not deduct this loss for 1994.                        
               Respondent also determined that petitioners were liable for            
          the accuracy-related penalty under section 6662(a), on account of           
          negligence.  Respondent determined that this penalty applied to             
          the total underpayment shown in the notice of deficiency.  The              
          total underpayment was attributable to the disallowed capital               
          loss, the increased income from the passive loss adjustment, and            
          two de minimis computational adjustments.                                   
               The instant dispute involves the recharacterization rule of            
          section 1.469-2(f)(6), Income Tax Regs., and the attribution rule           
          of section 1.469-4(a), Income Tax Regs.  Respondent used these              
          rules to recharacterize petitioners' rental income from the River           
          Falls building from passive income to nonpassive income.                    
          Petitioners do not argue that respondent misapplied these rules             
          or that the Commissioner lacked the authority to prescribe them.            
          Petitioners' sole argument is that section 1.469-2(f)(6),                   
          Income Tax Regs., is invalid as applied to them because,                    
          petitioners allege, the Commissioner prescribed section                     
          1.469-4(a), Income Tax Regs., which is necessary to apply the               
          recharacterization rule to a material participant of a C                    
          corporation's activity, without complying with the notice and               
          comment requirements of the Administrative Procedure Act (APA),             

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