Chester F. and Faye L. Sidell - Page 15

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               The final regulations were generally made effective for                
          taxable years beginning after May 10, 1992.  See sec. 1.469-                
          11(a)(1), Income Tax Regs.  However, section 1.469-11(b)(1), Income         
          Tax Regs., provides transitional relief for taxable years that end          
          after May 10, 1992, and begin before October 4, 1994.  Under the            
          transitional rules, taxpayers are allowed to determine their tax            
          liability in accordance with the proposed regulations promulgated           
          in 1992.  See sec. 1.469-11(b)(1), Income Tax Regs.                         
          Positions of the Parties                                                    
               The parties disagree as to the proper characterization of the          
          rental income from the Everett Mill, Kunhardt Mill, and FLS Realty          
          Trust properties.                                                           
               Petitioners seek to have the income Mr. Sidell received in             
          1993 and 1994 from the rental of these properties characterized as          
          income from a passive activity in order to use (1) passive losses           
          from the rental of other properties, and (2) rehabilitation credits         
          (claimed on their 1993 and 1994 returns) with respect to                    
          renovations made to the Kunhardt Mill property.                             
               Respondent relies on the self-rented property rule contained           
          in section 1.469-2(f)(6), Income Tax Regs., to support his                  
          characterization of the rental income from these properties as              
          nonpassive (or active) income.  Respondent maintains that pursuant          
          to section 469(l), the Secretary had the authority to prescribe             
          regulations necessary or appropriate to carry out the provisions of         

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