- 12 -
wholly owned personal service C corporation had to be
recharacterized as nonpassive because the building was rented to a
trade or business in which the taxpayer materially participated.4
In doing so, the court upheld the validity of the self-rented
property rule, citing the following portion of the preamble to
section 1.469-2T(f)(6), Temporary Income Tax Regs., 53 Fed. Reg.
5694 (Feb. 25, 1988):5
In the absence of regulations, a taxpayer
could derive passive activity gross income
from an active business in which tangible
property is used by renting the property to an
entity conducting the activity (or by causing
an entity holding the property to rent the
4 In Fransen v. United States, 82 AFTR 2d 6621, 98-2 USTC
par. 50776 (E.D. La. 1998), the taxpayer husband was the sole
shareholder of Fransen & Hardin, a personal service corporation.
The taxpayers leased a building (in which each had an undivided
one-half interest) to Fransen & Hardin. The taxpayers reported
$29,902 of net rental income which they sought to offset with
passive activity losses from other activities in the aggregate
amount of $32,606. The taxpayers argued that sec. 1.469-2(f)(6),
Income Tax Regs., "flatly contradicts the plain language of the
statute it purports to enforce: the statute deems rental activity
income passive with a minor exception, and the regulation's
allowance of recharacterization of that income as non-passive
renders the regulation invalid."
5 We note that the preamble further states:
the Conference Report accompanying the Act states that
it would be appropriate for the Service to exercise its
regulatory authority under sec. 469(l)(3) in the case
of "related party leases or sub-leases, with respect to
property used in a business activity, that have the
effect of reducing active business income and creating
passive income." H. Conf. Rept. 99-841, 99th Cong., 2d
Sess., Vol. II, at 147 (1986) [53 Fed. Reg. 5725 (Feb.
25, 1988).]
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011