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of positive income sources through the use of tax
losses derived from passive business activities.
Examples where the exercise of such authority may
(if the Secretary so determines) be appropriate include
the following * * * (2) related party leases or sub-
leases, with respect to property used in a business
activity, that have the effect of reducing active
business income and creating passive income * * *. [H.
Conf. Rept. 99-841, at 147, 1986-3 C.B. (Vol. 4) 1,
147.]
Petitioner also argues that the recharacterization rule is
inapplicable to this case by virtue of section 1.469-
11(c)(1)(ii), Income Tax Regs., which provides that the rule does
not apply to income “attributable to the rental of * * * property
pursuant to a written binding contract entered into before
February 19, 1988.” Petitioner asserts that the office building
lease in effect during 1994 was the 1987 lease, or, in other
words, that he leased the office building to the law firm during
1994 pursuant to a pre-February 19, 1988, written binding
contract. We disagree. As discussed below, we conclude that the
office building lease in effect during 1994 was the 1991 lease
and, moreover, that the 1991 lease and the 1987 lease are
separate contracts.
Applicable State (Wisconsin) law characterizes the 1991
lease as a renewal (as opposed to an extension) of the 1987
lease, which, in turn, means that the 1991 lease is a contract
separate from the 1987 lease. See Seefeldt v. Keske, 111 N.W.2d
574, 575-576 (Wis. 1961). We look at three critical factors to
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