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evidence. See Ware v. Commissioner, 92 T.C. 1267, 1268 (1989),
affd. 906 F.2d 62 (2d Cir. 1990).
It is clear that petitioners did not provide notice in their
petition of an intent to challenge the extent of petitioner’s
participation in BMS. Their petition states their disagreement
with respondent’s determination in the notice of deficiency
solely as follows:
We disagree with the adjustment based on Reg. Sec.
1.469-11(c)(1)(ii). The income from the “1203
Partnership” was attributable to the rental of property
pursuant to a written binding contract entered into
before February 19, 1988, and thus was properly
reported as passive income.
Petitioners never amended their petition to raise or assert
any other issue. No pretrial memoranda were filed by either
party. Counsel for petitioners first raised the issue of
petitioner’s participation in BMS in his opening statement.
Nevertheless, petitioners argue that respondent should have been
on notice that petitioner’s participation in BMS was at issue
because petitioners stipulated that petitioner was a material
participant in the PC but did not make such a stipulation with
regard to BMS.
Although the recharacterization rule applies only to a
taxpayer’s rental income from property rented for use in a trade
or business in which the taxpayer materially participates, see
sec. 1.469-2(f)(6), Income Tax Regs., rules governing the
grouping of activities prohibit a partner from treating
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