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operates a health club. The other corporation (the law firm)
operates a law firm. Petitioner actively works for the law firm
as an attorney.
Petitioner rents a building (the club) to the health club,
and he rents a second building (the office building) to the law
firm. Petitioner’s 1994 Federal income tax return reported that:
(1) He realized a $69,100 loss on the rental of the club, (2) he
realized income of $175,149 on the rental of the office building,
(3) the rental of the club and the rental of the office building
were separate passive activities under section 469, and (4) the
loss from one activity offset an equal amount of the income from
the other activity, resulting in the inclusion in petitioner’s
1994 taxable income of $106,049 of rental income. Respondent
determined that the rental income could not partially be offset
by the rental loss; respondent determined that the income was
recharacterized as nonpassive income under section 1.469-2(f)(6),
Income Tax Regs.,2 because petitioner materially participated in
2 The recharacterization rule of sec. 1.469-2(f)(6), Income
Tax Regs., provides:
(f)(6) Property rented to a nonpassive activity.
An amount of the taxpayer's gross rental activity
income for the taxable year from an item of property
equal to the net rental activity income for the year
from that item of property is treated as not from a
passive activity if the property--
(i) Is rented for use in a trade or business
activity * * * in which the taxpayer materially
(continued...)
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