Court Opinion

ID: 769425
Source: CourtListenerOpinion
Date Created: 2012-04-18 09:58:49+00
Date Added: 2024-06-11T17:55:42.984148
License: Public Domain

218 F.3d 733 (7th Cir. 2000)
Michael F. CONNOR and Jane H. Connor,     Petitioners-Appellants,v.Commissioner of Internal Revenue,    Respondent-Appellee.
No. 99-3324
In the  United States Court of Appeals  For the Seventh Circuit
Argued March 29, 2000Decided July 5, 2000

Appeal from the United States Tax Court.  No. 3552-98--John J. Pajak, Judge.
Before Flaum, Ripple and Kanne, Circuit Judges.
Kanne, Circuit Judge.

1
Michael and Jane Connor  appeal a tax court decision finding a deficiency  of $3,616 in their 1993 federal income tax and  $6,089 in their 1994 federal income tax. This  finding of deficiency arose from the  determination that Michael Connor actively  managed his personal services C corporation,  which rents an office building owned by Jane  Connor, and for this reason, the passive activity  loss rules barred the offset of income from the  rental against other passive losses. The Connors  claim on appeal that in 1993 and 1994 the  "material participation" requirement of the  passive activity rules did not apply to  shareholders in C corporations and that the lease  was exempted from passive activity rules under a  "written binding contract" exception. Because we  find that in 1993 and 1994, the "material  participation" test applied to shareholders in  non-pass-through entities and that the lease  between the C corporation and Jane Connor was not  binding, we affirm the decision of the tax court.

I.  History

2
Michael Connor is a dentist. He owns a majority  of the shares in his personal services C  corporation, Connor & McKeever, S.C.  ("corporation"), which was known in 1993 as  Michael F. Connor, D.D.S., S.C., and works full-  time for the corporation. The corporation leases  from Jane Connor, Michael Connor's wife, the  office building in which Michael Connor  practices. The Connors file a joint tax return.

3
The lease on Michael Connor's office commenced  in October 1979. According to the original  document, the lease was to run until October  1982, and thereafter to continue year to year  under the same terms and conditions. However, in  October 1982, the Connors signed an addendum to  the lease, which provided that "[t]his lease will  continue in force between [the Corporation] and  Jane H. Connor 'Lessor' until either party  terminates such with ninety days written notice.  Rental increases can only be made upon agreement  of both parties." Both parties continue to abide  by the terms of the lease up to the present, but  the rent has increased from $900 per month in  1979 to $2,000 per month in 1994.

4
In 1993, the Connors reported $10,503 in net  income from the lease of the office. The Connors  characterized this income as passive and used it  to set off certain passive losses from the rental  of a second property. In 1994, the Connors  reported $15,937 in net income from the lease of  the office. They characterized this income as  passive and again used it to set off passive  losses from the rental of other property.

5
In 1997, the Commissioner of Internal Revenue  ("Commissioner") issued a notice of deficiency to  the Connors, informing them that the Commissioner  had determined that the rental of the dental  office to be a non-passive activity. For this  reason, the Commissioner believed that the  Connors should not have offset their gains from  this activity against losses from their other  passive activities. The Commissioner assessed a  deficiency of $3,616 for 1993 and $6,089 for 1994  as a result of the Connors' mischaracterization  and also sought a penalty of $723 for 1993 and  $1,218 for 1994 for negligence, pursuant to  Internal Revenue Code (I.R.C.) sec. 6662(a).

6
The Connors contested this notice of deficiency  in tax court. They claimed that because the  Corporation, rather than Michael Connor, leased  the dental property, the rental was a passive  activity for the Connors. In support of this  position, they maintained that the 1993-1994  regulations applying the passive activity rules  provided that shareholders in C corporations did  not materially participate in the activities of  these corporations. The tax court disagreed,  holding that although Connor was only a  shareholder in the Corporation, he materially  participated in the lease, and for that reason,  the lease income was non-passive income for the  Connors. On this basis, the tax court affirmed  the deficiency claimed by the Commissioner but  declined to penalize the Connors for negligence.

II.  Analysis

7
On appeal, the Connors contest the determination  of the tax court on two grounds. First, they  argue that the tax court erred in concluding that  the passive activity regulations then in effect  deemed C corporation shareholders as materially  participating in the activities of those  corporations. We review de novo conclusions of  law reached by the tax court. See L & C Springs  Assocs. v. Commissioner, 188 F.3d 866, 869 (7th  Cir. 1999). Second, the Connors argue that the  "written binding contract" exception applies to  their lease, exempting the income generated by  the lease from the passive activity rules. For  this reason, the Connors claim that the tax court  erred as a matter of law in finding them in  deficiency. We review de novo this question of  law. See Pittman v. Commissioner, 100 F.3d 1308,  1312 (7th Cir. 1996).

A.  1993-94 Passive Activity Regulations

8
The Connors contend that during 1993-94, the  I.R.C. regulations in force allow them to use the  income generated from the lease between Jane  Connor and the corporation to offset certain  investment losses generated by other passive  investments in real estate held by Michael  Connor. The I.R.C. regulations in force prior to  1993 allowed the Connors to perform this income  offset, but the regulations issued in 1993 failed  to reenact the exemption that allowed the Connors  to do so, and in 1994, the regulations  promulgated by the Secretary of the Treasury  ended the Connors' ability to offset this income  by characterizing the rental income from the  lease as "non-passive" in contrast with the  "passive" income generated by the Connors' other  investment activities. Thus, the Connors ask us  to interpret the I.R.C. regulations governing  passive activity income attribution in effect in  1993-1994 to determine whether income generated  by a lease like that made by the Connors should  be considered passive or non-passive, a  determination which depends on whether a taxpayer  like Michael Connor can be said to "materially  participate" in the activities of his  corporation.

9
As part of the Tax Reform Act of 1986, enacted  at 26 U.S.C. sec. 1 et seq., Congress limited the  financial incentive for many taxpayers to  structure traditional tax shelters. Pursuant to  this legislative purpose, the passive activity  rules, enacted as I.R.C. sec. 469, disallow the  deductibility of certain losses generated by  "passive activities," except insofar as to offset  the gains from other passive activities. See  I.R.C. sec. 469(a). Section 469(c) defines a  passive activity as "any activity--(A) which  involves the conduct of any trade or business,  and (B) in which the taxpayer does not materially  participate." I.R.C. sec. 469(c)(1)(A)-(B).

10
Code section 469(h) defines "material  participation" in an activity as involvement that  is regular, continuous and substantial. See  I.R.C. sec. 469(h)(1)(A)-(C). To supplement this  provision, however, Congress also authorized the  Secretary of the Treasury to promulgate  regulations "which specify what constitutes an  activity, material participation, or active  participation for the purposes of this section."  I.R.C. sec. 469(l)(1).

11
Rental activities are expressly included as  passive activities, but if a taxpayer  participates materially in an entity involved in  the rental of property, the proceeds from that  rental may be deemed to arise from a non-passive  activity. See I.R.C. sec. 469(c)(2); Treas. Reg.  sec. 1.469-4. Passive activity rules apply to  personal services corporations, see I.R.C. sec.  469(a)(2)(C), and for purposes of determining  whether a taxpayer materially participates in an  activity, participation of his spouse will be  included as participation of the taxpayer. See  I.R.C. sec. 469(h)(5); Treas. Reg. sec. 1.469-5T  (f)(3); see also Fransen v. United States, 191 F.3d 599, 601 (5th Cir. 1999). On this basis, the  parties agree that if the regulations setting out  the passive activity rules deem Michael Connor to  have participated materially in the activities of  his personal services corporation, the income  from the rental of his dental office would be  characterized as non-passive.

12
The instant dispute centers on the regulations  issued by the Secretary to explain when a  taxpayer participates materially in an entity to  which he leases property, a scenario in which  "self-rental income" is generated. Prior to 1992,  the temporary regulations promulgated by the  Secretary to apply the passive activity rules  ("temporary regulations") provided that  shareholders in non-pass-through entities, such  as the corporation, did not participate  materially in the activities of such entity,  making self-rental income from a lease to a C  corporation passive in nature. See Temp. Treas.  Reg. sec. 1-469-4T(b)(2)(ii)(B) (1989). For pass-  through entities, the temporary regulations  applied a seven-part test to determine whether  the owners participated materially in the  entity's activities. See Temp. Treas. Reg. sec.  1.469-5T(a) (1989). If a taxpayer was determined  to have participated materially in an entity to  which he rented, the resulting self-rental income  was non-passive income and could not be offset  against other passive losses. Because of the  exemption for non-pass-through entities, Michael  Connor did not participate materially in the  rental activity of his personal services  corporation before 1993, and during this period,  the parties agree that the income from the rental  was appropriately characterized as passive  income.

13
Effective for all tax years beginning May 11,  1992, however, the Secretary replaced the  temporary regulations with a new set of proposed  regulations. See PS-01-89, 57 Fed. Reg. 20802  (1992). Rather than explicitly excluding the  shareholders in non-pass-through entities, the  proposed regulations applied a broader, "facts-  and-circumstances" test to all entities to  determine whether the activities of an entity and  an owner of the entity should be considered a  single activity. See Prop. Treas. Reg. sec.  1.469-4(c)(2) (1992). This facts-and-  circumstances test applied to self-rental income,  which continued to be considered a non-passive  activity if the taxpayer participated materially  in the entity to which he rented. See Prop.  Treas. Reg. sec. 1-469-2(f)(6) (1992). In  addition, the Secretary re-promulgated the seven-  part test for material participation, see Prop.  Treas. Reg. sec. 1-469-5T(a) (1992), but the  proposed regulations did not expressly address  the material participation of shareholders in  non-pass-through entities.

14
In 1994, the Secretary issued final regulations  applying I.R.C. sec. 469. The final regulations  generally maintained the same standards as the  proposed regulations. The final regulations  retained the seven-part material participation  test and the rule that self-rental income was to  be considered non-passive when a taxpayer  materially participated in the entity to which he  rented. However, the final regulations added  language clarifying that the seven-part material  participation test would be applied to  shareholders in non-pass-through entities to  which sec. 469 applied-- closely-held C  corporations and personal services corporations--  as well as to pass-through entities. See Treas.  Reg. sec. 1.469-4(a) (1994) ("A taxpayer's  activities include those conducted through C  corporations that are subject to section 469, S  corporations, and partnerships."). The final  regulations were to apply retroactively to all  tax years ending after May 10, 1992, see Treas.  Reg. sec. 1-469-11 (a)(1), but the final  regulations allowed taxpayers to apply either the  proposed regulations or the final regulations to  the 1993 and 1994 tax years. See Treas. Reg. sec.  1.469-11 (b)(2).

15
The Connors admit that under the final  regulations, the seven-part test for material  participation applies to determine whether  Michael Connor materially participates in the  activities of the Corporation and that, under  this test, Michael Connor materially participates  in the Corporation. Because Jane Connor's  activities are merged with his to determine  whether income arises from a passive activity,  the parties agree that, under the final  regulations, the self-rental income from the  lease to the Corporation has correctly been  characterized as non-passive in nature.

16
The Connors contend that, because of the change  of treatment of C corporation shareholders  between the temporary regulations and the final  regulations, the material participation test of  the proposed regulations cannot be interpreted to  apply to shareholders in non-pass-through  entities. On this basis, they claim that during  1993-1994, Michael Connor did not participate  materially in the activities of the Corporation.  Unlike both the temporary regulations and the  final regulations, the proposed regulations do  not address expressly whether shareholders in  non-pass-through entities materially participate  in the activities of these entities. The Connors  ask us to interpret this ambiguity in the  proposed regulations consistently with the  temporary regulations because it would be unfair  to construe the proposed regulations adversely to  taxpayers given the reversal in treatment of  shareholders in non-pass-through entities that  occurred between the promulgation of the  temporary regulations and the promulgation of the  final regulations. In support of this  interpretation, the Connors cite numerous  statements made by treasury officials when the  proposed regulations were promulgated that  allegedly indicate a desire to retain the same  treatment. However, we reject this  interpretation.

17
Instead, we uphold the IRS's interpretation of  the proposed regulations to deem C corporation  shareholders as materially participating in the  activities of these entities. The IRS has  interpreted the proposed regulations to require  the tax court to use a "facts-and-circumstances"  analysis on all entities to determine whether the  material participation standard is appropriate,  rather than retaining the C corporation exception  included in the temporary regulations. We grant  great deference to the IRS's interpretation of  its regulation and will uphold this  interpretation "unless it is plainly erroneous or  inconsistent with the regulation." Stinson v.  United States, 508 U.S. 36, 45 (1993); see also  Parsons v. Pitzer, 149 F.3d 734, 738 (7th Cir.  1998). The interpretation of the proposed  regulations endorsed by the IRS accords with the  purpose of the passive activity loss regulations,  which is to assess accurately whether a taxpayer  is involved in the active management of a trade  or business in such a fashion that passive  activity treatment would be inaccurate. See,  e.g., Temp. Reg. sec. 1.469, background, 53 Fed.  Reg. 5686, 5686-87 (1988).

18
The history of the material participation test  also favors the IRS's interpretation of the  proposed regulations. When the regulations  setting out the passive activity rules were  promulgated initially, shareholders in non-pass-  through entities were explicitly excepted from  the material participation test. See Temp. Treas.  Reg. sec. 1-469-4T(b)(2)(ii)(B) (1989). However,  in response to criticism about the "mechanical"  nature of the temporary regulations, the  Secretary allowed many of the passive activity  regulations to expire and failed to re-enact many  provisions, including the exception at issue  here. Courts generally refuse to construe a  failure to re-enact a portion of a statute as  indicative of a desire to retain the rule set  forth in that portion. See, e.g., Keppel v.  Tiffin Savings Bank, 197 U.S. 356, 373 (1905); In  re UNR Indus., Inc., 736 F.2d 1136, 1139 (7th  Cir. 1984). The traditional rule of statutory or  regulatory construction holds instead that  failure to re-enact a statutory provision deems  that provision repealed by implication. See 1A  Norman J. Singer, Sutherland Statutory  Construction, sec. 23.28, at 413 (6th ed. 1988).  On this basis, tax courts have twice interpreted  the proposed regulations to deviate in intent and  structure from the previously effective temporary  regulations. See Sidell v. Commissioner, 78  T.C.M. 423,1999 WL 695695 (1999)("[T]he Secretary did not  intend in those proposed regulations to adhere to  the position previously taken in the temporary  regulations."); Schwalbach v. Commissioner, 111 T.C. 215, 228 (1998) (concluding that "nothing in  the [proposed regulations] that would lead [the  court] to believe that the Commissioner was  proposing to retain the rule" exempting  shareholders in non-pass-through entities).

19
Instead of retaining a mechanical test to judge  a taxpayer's activities, including a mechanical  exception for shareholders in non-pass-through  entities, on promulgation of the proposed  regulations, the Secretary shifted to a broader  "facts and circumstances" analysis of these  activities. This shift in analytical style  implies a repeal of all the mechanical tests  previously used to compute whether a taxpayer  participated materially in a given activity,  except those tests that were expressly re-enacted  by the Secretary, such as the seven-part material  participation test. For this reason, the natural  interpretation of a failure to renew the  protection of shareholders like the Connors is  not an implied retention of the per se rule that  these shareholders cannot participate materially.

20
We believe that the natural interpretation of  the failure to renew expressly this regulation is  that taxpayers should be placed on notice that  the Secretary expanded the existing standard for  material participation in an activity, to which  all taxpayers would now be subject. As such, by  enacting the proposed regulations, the Secretary  repealed by implication any per se exclusion of  shareholders in non-pass-through entities and  deemed that these taxpayers participate  materially in the activities of the entities in  which they possess an ownership interest when  they meet the seven-part test previously  applicable only to taxpayers in pass-through  entities. On this basis, we believe that the  proposed regulations contemplate the inclusion of  shareholders in non-pass-through entities within  the seven-part test for material participation in  an entity's activities. Because Connor admits  that his activities constitute material  participation under this test, we find that he  participated materially in the activities of the  Corporation in 1993-1994, and for this reason,  the income generated from the rental of his  office space to the corporation would be non-  passive in nature.

B.  Written Binding Contract Exception

21
The Connors also contend that the income  generated by the lease between Jane Connor and  the corporation may be characterized as passive  because the parties first entered into the lease  in 1979. The final passive activity regulations  include a provision allowing taxpayers to  characterize leases as passive when these leases  were made by "written binding contract" prior to  February 19, 1988. See Treas. Reg. sec. 1.469-  11(c)(1)(ii).

22
The government contends that because both  parties retain the right to terminate the lease  unilaterally on ninety-days notice, the lease is  not a written binding contract within the meaning  of sec. 1.469-11(c)(1)(ii), even though the lease  between the corporation and Jane Connor was  initially entered into in 1979 and amended in  1982. The government argues that the purpose of  the exemption is to protect certain long-term  leases that were entered into prior to the  promulgation of the regulations because of the  cost to taxpayers of restructuring these leases  to avoid adverse tax consequences. Because both  parties reserve the right to terminate the lease,  the government contends that neither party is  "bound" by the contract, and the taxpayers do not  require the protection of the exemption to  restructure the terms of the lease.

23
The temporary regulations included an  explanatory provision, which defined a contract  as written and binding "if and only if the  contract is enforceable against such person under  the applicable State law and does not limit  damages to a specified amount (e.g., by use of a  liquidated damages provision). . . . In general,  a contract is binding upon a person even if it is  subject to a condition, as long as the condition  is not within the control of such person." Temp.  Treas. Reg. sec. 1.469-11T(c)(7) (1989). However,  because this definition was included within the  transition rules applying the passive activity  regulations, this definition was not re-  promulgated when the Secretary issued the  proposed or final regulations. For this reason,  although informative as to the intent of the  drafters of the exemption, we will not be  compelled to accept this interpretation of the  "written binding contract" requirement if we  determine that this interpretation violates the  purpose and plain language of the exemption. The  government also cites other instances in which  the Secretary has promulgated regulations  requiring a written binding contract in which the  term has been interpreted in the same manner, See  Temp. Treas. Reg. sec. 1.168(j)-1T; see also Bell  Atlantic Corp. v. United States, No. 96-8657,  1998 WL 848122, at *3-4 (E.D. Pa. 1998)  (interpreting written binding contract  requirement of sec. 203(b) of Tax Reform Act of  1986 using the same definition, also provided in  the applicable transitional rules). However,  these other transitional rules, albeit similar,  provide little new insight into the  interpretation of the term "written binding  contract" in this regulation, and we focus  instead on interpreting the plain language of  sec. 1.469-11T(c)(7).

24
No other court has had the occasion to  interpret sec. 1.469-11T(c)(7), and when  resolving a dispute over the meaning of a  statute, we look to the statute itself to  determine whether the statute is plain and  unambiguous with regard to the dispute. See  United States v. RonPair Enterprises, Inc., 489 U.S. 235, 241 (1989); Matter of Voelker, 42 F.3d 1050, 1051 (7th Cir. 1994). In this case, the  language of the transitional rule appears  unambiguous. To qualify for exemption from  passive activity characterization, a lease must  be in writing and it must be binding. At a  minimum, for a lease to be binding on a party, it  must be enforceable under applicable state law.  Because the lease involves Wisconsin property, we  must first apply Wisconsin law to determine if  the lease binds the parties.

25
Wisconsin's statute on rental agreements  requires that for a lease with a duration of more  than one year to be enforceable, it must meet the  state Statute of Frauds, Wis. Stat. sec. 706.02,  and also set forth "the amount of rent or other  consideration, the time of commencement and  expiration of the lease and a reasonably definite  description of the premises." Wis. Stat. sec.  704.03(1). Wisconsin law allows parties to a  lease the option to extend their lease, in which  case, no new lease is required. See Nelson v.  Nelson, 169 N.W. 278, 279 (Wis. 1918). Instead,  the extended lease is treated as "a continuance  of the original [lease] for a further time upon  compliance with the conditions for [the option's]  exercise." Seefeldt v. Keske, 111 N.W.2d 574, 575  (Wis. 1961). However, the amount of rent and the  premises to be leased are essential terms to the  contract, and essential terms to a lease cannot  be modified without meeting the Statute of  Frauds. See Borkin v. Alexander, 132 N.W.2d 587,  590 (Wis. 1965).

26
The original lease between the parties stated a  specific date of commencement and expiration, a  term of greater than one year and a specific  amount of rent. As such, this lease met both the  requirements of the Statute of Frauds and the  additional requirements of sec. 704.03(1).  Therefore, the original lease was binding on the  parties under Wisconsin law. However, this lease  would have expired by its own terms on October  31, 1982, so on that date, the parties signed an  "addendum" to the lease, which amended the lease  to allow it to continue in force "until either  party terminates such with written notice of 90  days" and to allow rental increases with the  agreement of both parties.

27
The Connors contend that the original lease  granted the parties to the lease an option to  renew the lease. By signing the addendum, they  argue that they exercised this option to renew  with the additional terms of the addendum  constituting amendments to the original lease,  which continued in force. Because they merely  renewed a binding lease, they argue that the  lease continued to be binding as long as the  parties agreed not to terminate it, up to and  including the period of 1993-94.

28
The original lease provided for a term of three  years, and thereafter allowed the lease to  continue "from year to year under the same terms  and conditions." We agree that this provision  within the lease bestows on the parties the  option to renew the lease, and we accept the  Connors' position that the addendum to the lease  constitutes an exercise of this option. However,  the addendum included two amendments to the lease  that changed its essential terms. First, the  addendum provided that the lease would continue  in force until terminated by either party with  ninety-days written notice. Second, the addendum  adds the provision that the parties may increase  the rent amount on agreement of both parties.

29
These amendments render the lease unenforceable  under Wisconsin law. Section 704.03 requires for  a lease to be "enforceable" that the lease must  set forth in writing "the amount of rent or other  consideration," and "the time of commencement and  expiration of the lease." Wis. Stat. sec.  704.03(1). The amount of rent due under the terms  of the original lease was set at $10,800 per  year, and the Connors contend that this original  statement satisfies the requirement that the  lease set forth the amount of rent. However the  parties amended the lease to allow them to  increase the rent, and this amendment made it  possible for the parties to increase the rent to  $22,000 per year in 1993 and $24,000 per year in  1994. Because these modifications were oral and  not written and because the Wisconsin Statute of  Frauds requires that increases in rent, like  other modifications to essential terms of a  contract, be made in writing, see Borkin, 132 N.W.2d at 590, these rental increases would not  have been enforceable in 1993 or in 1994. As  such, we hold that the amendment to the lease  that allowed the parties to change the amount of  rent cancelled the explicit written amount of  rent required by sec. 704.03(1).

30
The addendum also changed the term of the lease  from a fixed period of three years to an  indefinite term to be determined by either party.  For this reason, the lease, as amended, does not  set forth in writing the time of expiration of  the contract. The Connors argue that the  definition of lease provided by statute allows  for an indefinite point of termination; "a lease  is for a definite period of time . . . if the  commencement and expiration can be ascertained by  reference to some event, such as the completion  of a building." Wis. Stat. sec. 704.01(1). The  Connors suggest that the event by which to  reference the expiration of the lease is the  written notice of termination given by a party,  in which case the date of termination is  specified in the lease. However, this  interpretation of an "event" does not correspond  to the example of an "event" provided in the  statute, the completion of a building. From the  example provided in the statute, we infer sec.  704.01 to allow a lease to contain indefinite  commencement or termination only when this  termination lies beyond the direct control of the  parties, as when the parties cannot occupy a  building that has not been completed. The  Connors' assertion, that any point at which a  party wishes to terminate the lease is a definite  "time of termination" renders the statutory  requirement of a written date of termination  meaningless. For this reason, by changing the  term of the lease from a three-year period to an  indefinite period corresponding to the intent of  the parties, the parties failed to include the  necessary terms in the contract required by sec.  704.03(1).

31
Because the parties changed essential terms of  the lease by signing the addendum to the lease,  they rendered the lease unenforceable under  Wisconsin law. Had either party sought to  challenge the terms of the lease, especially  those terms that were orally modified pursuant to  the addendum, that party would not have been  bound by the terms of the lease. For this reason,  we believe that by signing the addendum, the  lease no longer remained enforceable or binding  on the parties. The income generated by the lease  should not be shielded from non-passive  characterization by the "written binding  contract" exception to the passive activity  rules.

32
The Connors argue that they remained bound by  the contract because they were required to  provide ninety-days notice under the terms of the  lease. However, this argument lacks merit. Under  Wisconsin law, landlords must provide tenants  with notice of termination of a lease before the  lease expires, even if that lease is  unenforceable. See Wis. Stat. sec.sec. 704.03(2),  704.19. If a lease is unenforceable--if it fails  to meet the requirements of sec. 704.03(1)--the  lease is treated as a periodic tenancy, with the  period determined by the type of use of the  leased premises. See sec. 704.03(2). If the  premises are used for non-residential purposes,  the lease is treated as a year-to-year tenancy,  and the tenant must be provided with at least  ninety-days notice. See id.; sec. 704.19(3). This  ninety-day period required by statute corresponds  exactly with the ninety-days notice required by  the addendum to the lease. Therefore, under the  terms of the addendum, the parties are "bound" to  provide no more notice under the terms of the  contract than would they be were there no written  contract at all. To interpret the requirement  that a written contract be "binding" under Treas.  Reg. sec. 1.469-11(c)(1)(ii) to include  unenforceable common law contracts as well as all  enforceable written leases, would eviscerate the  word "binding" of all meaning, an interpretation  we refuse to permit. See generally United States  v. Szakacs, 212 F.3d 344, 352-53 (7th Cir. May 2, 2000) (refusing to  interpret the term "another felony offense" in a  manner that would render superfluous the word  "another").

33
From the period 1979-1982, the lease between  the Corporation and Jane Connor was a written  binding contract. However, because the amendments  to the lease rendered it unenforceable under  Wisconsin law, from 1982, the lease no longer  remained binding on the parties. For this reason,  the lease was not a "written binding contract" as  of 1988, and the Connors cannot rely on the  "written binding contract" exception to the  passive activity rules to shield the income  generated by this lease from non-passive  characterization.

III.  Conclusion

34
Because we find that, during the 1993-94  period, the proposed Treasury regulations  governing attribution of passive activity income  should be interpreted to allow shareholders in C  corporations to participate materially in the  activities of these corporations and because we  find that the 1979 contract executed between the  Corporation and Jane Connor was not binding on  the parties in 1988, we Affirm the determination of  the tax court.