Schwalbach v. Commissioner
United States Tax Court
Ps rented a building to a personal service corporation for use in a business activity in which P materially participated. On Ps' 1994 Federal income tax return, Ps offset the rental income with unrelated passive losses. Relying on secs. 1.469-2(f)(6) and 1.469-4(a), Income Tax Regs., R determined that Ps could not offset the rental income with the passive losses because the rental income was recharacterized as nonpassive income.
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Ps rented a building to a personal service corporation for use in a business activity in which P materially participated. On Ps' 1994 Federal income tax return, Ps offset the rental income with unrelated passive losses. Relying on secs. 1.469-2(f)(6) and 1.469-4(a), Income Tax Regs., R determined that Ps could not offset the rental income with the passive losses because the rental income was recharacterized as nonpassive income. Ps argue that sec. 1.469-2(f)(6), Income Tax Regs., is invalid as applied to them because the meaning of the word "activity" as used therein does not include…
1Opinion of the Court
Laro, Judge:
Petitioners petitioned the Court to redetermine respondent’s determination of an $11,869 deficiency in their 1994 Federal income tax and a $2,374 accuracy-related penalty under section 6662(a). Following concessions by petitioners, the primary issue left to be decided is whether sections 1.469-2(f)(6) and 1.469-4(a), Income Tax Regs., are valid as applied to recharacterize the rental income of an individual who rents property to a personal service corporation for use in a business in which the individual materially participates. We hold they are. We also decide whether petitioners…
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