Cal Interiors Incorporated, et al. - Page 4

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          $23,387, and $22,160.  Each of the other five rental properties             
          reported a net loss such that the combined losses of the five               
          properties in each year exceeded the net income from the office.            
                                       OPINION                                        
               Respondent determined that the Beechers’ net income from               
          their rental of the office was nonpassive income under the                  
          recharacterization rule of section 1.469-2(f)(6), Income Tax                
          Regs.,2 because the Beechers materially participated in the                 
          business activity of the lessees; i.e., the corporations.  Thus,            
          respondent determined, the net income from the office could not             
          be offset by any of the losses from the other rental properties.            
          Petitioners do not dispute respondent’s determination that the              
          recharacterization rule on its face treats the net income from              
          the office as nonpassive.  Nor do they dispute respondent’s                 
          determination that the recharacterization rule on its face, as              
          applied to them, precludes them from offsetting the net income of           


               2 The recharacterization rule of sec. 1.469-2(f)(6), Income            
          Tax Regs., provides:                                                        
                    (f)(6) Property rented to a nonpassive activity.                  
               An amount of the taxpayer’s gross rental activity                      
               income for the taxable year from an item of property                   
               equal to the net rental activity income for the year                   
               from that item of property is treated as not from a                    
               passive activity if the property--                                     
                         (i) Is rented for use in a trade or business                 
                    activity * * * in which the taxpayer materially                   
                    participates (within the meaning of sec. 1.469-5T)                
                    for the taxable year; * * *                                       





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