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The facts of the instant case appear to fall within the
description of activity that Congress intended to prevent.
Petitioners’ interpretation of section 1.469-2(f)(6), Income
Tax Regs., would effectively allow a taxpayer to subvert
Congress’s intent. Petitioners’ interpretation would allow a
taxpayer to convert nonpassive income into passive income against
which passive losses could be offset by manipulating the payment
of rent from a business controlled by the taxpayer on property
rented from the taxpayer to the controlled business.12 See Shaw
v. Commissioner, T.C. Memo. 2002-35. By converting nonpassive
income into passive income in this manner, such a taxpayer would
be able to shelter otherwise nonpassive income with passive
losses. Petitioners’ interpretation would allow petitioners to
shelter nonpassive income from the Bear Valley Road property with
passive loss from the John Glenn Road property, contrary to
congressional intent.13
12Because sec. 1.469-2(f)(6), Income Tax Regs., would apply
to recharacterize self-rental income under petitioners’
interpretation only to the extent such income exceeds passive
losses within the activity grouping, only the excess would be
subject to recharacterization. An amount of passive income equal
to the amount of passive losses would retain its passive
character and, therefore, be sheltered by passive losses within
the grouping.
13The result in this case might appear harsh, since, as
respondent’s brief recognizes, had the restaurant paid its rent
on the John Glenn Road property, petitioners could have properly
offset related expenses against that rental income. However, we
must base our decision on the facts of the instant case: the
(continued...)
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