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Notice of Deficiency
In the notice of deficiency dated March 11, 1998, respondent
recharacterized the positive 1993 income from the Everett Mill and
Kunhardt Mill properties and the positive 1994 income from the
Everett Mill and FLS Realty Trust properties from passive to
nonpassive pursuant to section 1.469-2(f)(6), Income Tax Regs.; the
recharacterization resulted in petitioners' 1993 and 1994 taxable
income being increased by $45,030 and $42,505, respectively. In
addition, as a consequence of respondent's recharacterization,
respondent determined that petitioners' regular tax liability
allocable to all passive activities for 1993 and 1994 was
insufficient to enable them to use the rehabilitation credits
claimed for those years. See sec. 469(d)(2).
OPINION
Central to the dispute in this case is the validity of the so-
called self-rented property rule contained in section 1.469-
2(f)(6), Income Tax Regs., which provides:
Property rented to a nonpassive activity.--An amount
of the taxpayer's gross rental activity income for the
taxable year from an item of property equal to the net
rental activity income for the year from that item of
property is treated as not from a passive activity if the
property--
(i) Is rented for use in a trade or
business activity * * * in which the taxpayer
materially participates * * * for the taxable
year.
Pursuant to this rule, and by virtue of the attribution rule of
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