Samarasinghe v. Comr., T.C. Memo. 2012-23

(petitioner’s rental income derived from rental of commercial office building to related professional corporation in 2005 and 2007 was properly recharacterized as non-passive income under the self-rental rule of Treas. Reg. Sec. 1.469-2(f)(6) which treats net rental income received by taxpayer for use of an item of the taxpayer’s property in a business in which the taxpayer materially participates as income not from a passive activity with the result that petitioner cannot offset such income against accumulated and unused passive losses; transitional relief not available even though lease entered into before February 19, 1988; determination had to be made whether lease was still in effect for tax years in issue under state (NJ) law; NJ law does not distinguish between a renewal and a lease extension; lease was binding and enforceable at time executed in 1980, but record contained no credible evidence regarding history and enforceability of lease for periods after initial rent term which ended in 1981; for years in issue, parties paid no attention to terms of lease and ignored rent provision and rental arrangement for years at issue completely ad hoc and determined after analysis of petitioner’s financial situation; accuracy-related penalty not imposed).

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