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Second, petitioners argue that even if the application of the
self-rented rule to a closely held C corporation is deemed valid,
attribution/recharacterization cannot apply to any taxable year
beginning before October 4, 1994, when the final regulations
(discussed infra) were adopted. Thus, petitioners contend that
they may determine their 1993 and 1994 tax liability under the
proposed regulations promulgated in 1992 (section 1.469-4, Proposed
Income Tax Regs., 57 Fed. Reg. 20802 (May 15, 1982), PS-1-89, 1992-
1 C.B. 1219), thereby avoiding the self-rented property rule and
rendering the rental income in question as passive (hereinafter
this argument is referred to as petitioners' proposed regulations
argument). Respondent acknowledges that under the transitional
relief provided in section 1.469-11(b), Income Tax Regs., taxpayers
are permitted to determine their tax liability in accordance with
the 1992 proposed regulations for taxable years ending after May
10, 1992, and beginning before October 4, 1994. Nevertheless,
respondent asserts that under those proposed regulations
petitioners' 1993 and 1994 tax liability would be the same as under
the final regulations because under the proposed regulations a C
corporation's activities would be attributed to its shareholders,
resulting in the rental income in question being characterized as
nonpassive.
Finally, petitioners assert that, assuming arguendo the rental
income from the Everett Mill, Kunhardt Mill, and FLS Realty Trust
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