The petitioners, a married couple, owned an S corporation that held real estate and a medical C corporation. The husband worked full-time for the C corporation and materially participated in its business activity. The couple did not, however, materially participate in the S corporation and they were not engaged in a real estate trade or business. For the years at issue, the S corporation lease commercial real estate to the C corporation. The S corporation had rental income of about $50,000 in each of the two years at issue, which the petitioners reported as passive income, not subject to self-employment tax. They also offset the rental income with passive losses from other S flow-through entities they owned as well as losses from other rental properties that they owned. The IRS viewed the rental income as non-passive under Treas. Reg. Sec. 1.469-2(f)(6) (the "self-rental" rule) and disallowed passive losses that exceeded adjusted passive income for the years at issue. The petitioners, however, argued that I.R.C. Sec. 469 did not apply to S corporations and was invalid. The court disagreed even though I.R.C. Sec. 469, on its face, does not say that it applies to S corporations because it need not identify S corporation due to the S corporation shareholders are the taxpayers to whom I.R.C. Sec. 469 actually applies. In addition, the court ruled that Treas. Reg. Sec. 1.469-4(a) validly interpreted "activity" as used in I.R.C. Sec. 469. Thus, the rental activity was subject to I.R.C. Sec. 469. The court also held that the self-rental rule applied and rejected the petitioners' argument that the self-rental rule didn't apply because the S corporation, as lessor, didn't participate in the C corporation's trade or business. As such, the rental income was properly recharacterized as non-passive and couldn't be used with passive losses. Williams v. Comr., T.C. Memo. 2015-76.