When is a rental property not a rental property?

• Jurisdiction: United States
• Date: 01 October 2000
• Author: Moore, Philip E.

In Krutkowski, 114 TC No. 25, the Tax Court concurred with the IRS's determination that rental income received by the sole shareholder of a C corporation from his corporation was nonpassive and could not be offset by other passive losses.

Krutkowski was the sole shareholder of two C corporations. One corporation operated a health club; the other operated a law firm for which Krutkowski worked as an attorney. Krutkowski materially participated in the law firm, but not in the health club. Krutkowsld realized a loss renting a building to the health club; he realized income renting a building to the law firm.

Krutkowski's income tax return reported both the income and the loss as passive. The Service recharacterized the income as nonpassive under the recharacterization rules of Kegs. Sec. 1.469-2(f)(6).

The Tax Court ruled:

* The recharacterization rule is valid.

* State law determines whether a lease is extended or renewed; if renewed, the lease is a new lease and does not...