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BEGHE, J., concurring in part and dissenting in part: I
agree with the majority that section 1.469-2(f)(6), Income Tax
Regs. (popularly known as the self-rental rule, and referred to
by the majority and hereinafter as the recharacterization rule),
as in effect interpreted by the final 1994 activity regulation,
section 1.469-4(a), Income Tax Regs., is a valid regulation. I
also agree that petitioners are not entitled to effective date
relief from the recharacterization rule under the pre-1988
written binding contract exception of section 1.469-11(c)(1)(ii),
Income Tax Regs. However, I respectfully dissent from the
majority’s conclusion that petitioners are not entitled, under
section 1.469-11(b)(1), Income Tax Regs., to transitional relief
from application of the recharacterization rule for 1994 to the
net rental income from Mr. Krukowski’s C corporation law firm.
The key question is whether shareholders did materially
“participate” in the “activities” of their C corporations under
the regulatory law applicable to 1994. The majority conclude
that shareholders did so participate, under their “plain reading”
of section 469 and the recharacterization rule and their
interpretation of the “silent” 1992 proposed regulations that
flows therefrom. I disagree.
I. The Majority’s “Plain Reading” of Section 469 and the
Recharacterization Rule Is Unprecedented and Incorrect
The majority’s plain meaning approach to this case is
unprecedented, in several disquieting respects. To begin with,
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