Thomas P. and Ermina A. Krukowski - Page 1

                                    114 T.C. No. 25                                     

                                UNITED STATES TAX COURT                                 

                  THOMAS P. AND ERMINA A. KRUKOWSKI, Petitioners v.                     
                     COMMISSIONER OF INTERNAL REVENUE, Respondent                       

               Docket No. 7765-98.                      Filed May 22, 2000.             

                    P was the sole shareholder of two C corporations.                   
               One corporation operated a health club; the other                        
               operated a law firm for which P worked as an attorney.                   
               P realized a loss renting a building to the health                       
               club, and he realized income renting a building to the                   
               law firm.  P’s 1994 Federal income tax return reported                   
               that the loss and income were both “passive” under sec.                  
               469, I.R.C., and that the loss offset part of the                        
               income.  R disallowed the offset because, R determined,                  
               the recharacterization rule of sec. 1.469-2(f)(6),                       
               Income Tax Regs., deemed the income nonpassive.  Held:                   
               The recharacterization rule is valid.  Held, further,                    
               the written binding contract exception of sec. 1.469-                    
               11(c)(1)(ii), Income Tax Regs., is inapplicable to the                   
               facts herein.  Held, further, the transitional rule of                   
               sec. 1.469-11(b)(1), Income Tax Regs., does not operate                  
               to avoid application of the recharacterization rule.                     

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