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rental of that item of property pursuant to a written binding
contract entered into before February 19, 1988” from the
recharacterization rule of section 1.469-2(f)(6), Income Tax
Regs.
Petitioners contend that the lease agreements between the PC
and the 1203 Partnership and between BMS and the 1203 Partnership
in effect for the years in issue were both entered into before
February 19, 1988, and therefore, income derived from the 1203
Partnership’s rental activity is passive. They further argue
that the 1203 Partnership’s income from BMS’s lease of office
space is passive income regardless of which lease agreement was
in effect for the years in issue because petitioner was not a
material participant in BMS.
Respondent argues that new leases which changed material
provisions of the original leases were executed after February
19, 1988. Respondent thus maintains that the net rental income
from the 1203 Partnership in 1994, 1995, and 1996 was not
attributable to leases entered into before February 19, 1988.
Respondent further argues that petitioners have failed to
properly bring before the Court the issue of petitioner’s
participation in BMS.
Lease Agreements
We first examine the lease agreements at issue. State law
governs the nature of property rights, and Federal law determines
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