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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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