Thomas P. and Ermina A. Krukowski - Page 3




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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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