Chester F. and Faye L. Sidell - Page 18

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          properties is properly recharacterized as nonpassive (or active)            
          income under section 1.469-2(f)(6), Income Tax Regs., nonetheless,          
          respondent was without authority to disallow the claimed                    
          rehabilitation credit (hereinafter this argument is referred to as          
          petitioners' credit argument).  According to petitioners, denial of         
          the rehabilitation credit defeats the express legislative policy            
          goal underlying the enactment of section 47; namely, to preserve            
          historic landmarks and to provide an economic stimulus to areas             
          susceptible to abandonment.                                                 
               Petitioners maintain a distinction between recharacterizing            
          income, on the one hand, and recharacterizing the underlying                
          activity, on the other.  In this regard, petitioners contend that           
          section 1.469-2(f)(6), Income Tax Regs., authorizes respondent only         
          to recharacterize income, not to disallow the section 47 credit.            
          Respondent counters by asserting that once petitioners' net rental          
          income is recharacterized as nonpassive, the limitation on passive          
          activity credits (rather than section 1.469-2(f)(6), Income Tax             
          Regs.) mechanically disallows the rehabilitation credit.                    
          Standard of Review of Section 1.469-2(f)(6), Income Tax Regs.               
               Petitioners invite us to invalidate a portion of a regulation,         
          section 1.496-2(f)(6), Income Tax Regs.  This we do only in the             
          gravest of circumstances.  A regulation must be sustained unless            
          unreasonable, plainly inconsistent with the Internal Revenue Code,          
          arbitrary, or capricious.  See Commissioner v. South Tex. Lumber            

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