Tony R. Carlos and Judith D. Carlos - Page 1

                                   123 T.C. No. 16                                    

                               UNITED STATES TAX COURT                                

                 TONY R. CARLOS AND JUDITH D. CARLOS, Petitioners v.                  
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 5512-03.           Filed September 20, 2004.                

                    Ps owned and actively engaged in the conduct of                   
               two S corporations, B and J.  B rented real property BB                
               from Ps, and J rented real property JJ from Ps.  Ps                    
               grouped the two rentals together to make up a single                   
               passive “activity” for purposes of sec. 469, I.R.C.  B                 
               paid its rent on BB according to its lease with Ps,                    
               resulting in income to Ps.  J did not pay its rent on                  
               JJ under its lease with Ps, resulting in a loss to Ps.                 
               Ps netted the income and loss from the two rentals,                    
               claiming nonpassive net rental income.  R, however,                    
               determined that the income and loss items could not be                 
               netted, that the income from renting BB was nonpassive                 
               and the loss from renting JJ was passive, and that Ps                  
               could not offset the nonpassive BB income with the                     
               passive JJ loss.                                                       

                    Held:  Sec. 1.469-2(f)(6), Income Tax Regs.,                      
               recharacterizes rental income from the taxpayer’s                      
               active business as nonpassive, thereby removing such                   

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