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years 1994, 1995, and 1996 of $20,753, $18,151, and $4,920,
respectively.
Respondent determined that the income from the 1203
Partnership was nonpassive income pursuant to the
recharacterization rule of section 1.469-2(f)(6), Income Tax
Regs. After consideration of the passive activity loss
limitations, respondent determined that petitioners’ passive
activity losses were $412, $4,220, and $0 for 1994, 1995, and
1996, respectively. Respondent increased petitioners’ taxable
income for the years accordingly. As a result of respondent’s
adjustments, respondent reduced petitioners’ itemized deductions
in each year at issue and determined deficiencies in petitioners’
income taxes of $6,328, $4,018, and $1,571 for the 1994, 1995,
and 1996 respective tax years.
Petitioners do not challenge respondent’s computations but
argue that their rental income from the 1203 Partnership is
passive income and not subject to the recharacterization rule of
section 1.469-2(f)(6), Income Tax Regs.
Discussion
Section 469 sets forth the passive activity loss rule which
generally allows losses generated by passive activities to be
offset only against gains from other passive activities. Section
469(c) defines a passive activity as any activity which involves
the conduct of any trade or business and in which the taxpayer
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