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activities grouped together by a section 469 entity as separate
activities; see sec. 1.469-4(c)(5), Income Tax Regs. Therefore,
if the 1203 Partnership grouped its rentals to the PC and to BMS
as a single activity, petitioners are not at liberty to treat the
income from the rentals as from two separate activities. If the
rentals constitute a single activity, it is irrelevant whether
petitioner was a material participant in BMS. His material
participation in the PC is sufficient to recharacterize all of
his share of the 1203 Partnership’s income.
Under these circumstances, the fact that the parties made no
stipulation regarding petitioner’s participation in BMS would not
give respondent notice that petitioners intended to contest this
issue. Respondent, however, did not object to testimony elicited
from the PC’s president concerning petitioner’s involvement with
BMS. When issues not raised by the pleadings are tried by
implied consent of the parties, the issues are treated as if they
had been raised in the pleadings. See Rule 41(b). Failure to
amend the pleading, does not affect the result of the trial of
these issues. See id. When petitioner introduced the issue at
trial and respondent acquiesced in the introduction of evidence
on that issue without objection, Rule 41(b) was satisfied. See
Parekh v. Commissioner, T.C. Memo. 1998-151; Chiu v.
Commissioner, T.C. Memo. 1997-199. We, therefore, consider
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