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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