Chester F. and Faye L. Sidell - Page 16

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          section 469, including regulations requiring net income or gain             
          from a limited partnership or other passive activity to be treated          
          as not from a passive activity.  See sec. 469(l)(3).  Continuing,           
          respondent posits that pursuant to that authority, the Secretary            
          properly promulgated the self-rented property rule, which                   
          recharacterizes rental income as nonpassive (or active) income when         
          a taxpayer rents property to an activity in which the taxpayer              
          materially participates.                                                    
               Petitioners challenge respondent's determinations, making              
          three arguments.  First, petitioners assert that section 1.469-             
          2(f)(6), Income Tax Regs., is invalid insofar as it recharacterizes         
          rental income received from a C corporation from passive to                 
          nonpassive (hereinafter this argument is referred to as                     
          petitioners' validity argument).  Petitioners maintain that in              
          order for the self-rented property rule to apply, (1) the property          
          must be rented for use in a trade or business activity in which the         
          taxpayer materially participates, and (2) the activities of a C             
          corporation cannot be attributed to a taxpayer/shareholder in               
          determining whether that taxpayer has materially participated in            
          the corporation's business activity.  According to petitioners,             
          application of section 1.469-2(f)(6), Income Tax Regs., to a C              
          corporation is contrary to the plain language, origin, and purpose          
          of the passive activity rules.                                              

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