Chester F. and Faye L. Sidell - Page 12

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          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).]                                                            

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