In the
United States Court of Appeals
For the Seventh Circuit

No. 99-3324

Michael F. Connor and Jane H. Connor,

Petitioners-Appellants,

v.

Commissioner of Internal Revenue,

Respondent-Appellee.



Appeal from the United States Tax Court.
No. 3552-98--John J. Pajak, Judge.


Argued March 29, 2000--Decided July 5, 2000



      Before Flaum, Ripple and Kanne, Circuit Judges.

      Kanne, Circuit Judge. 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
      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.

      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.

      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.

      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).

      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

      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

      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.

      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).

      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).

      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.

      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.

      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.

      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).

      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.

      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.

      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).

      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. 99-1929 (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).

      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.


      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

      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).

      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.

      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).

      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.

      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).

      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.

      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.

      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.

      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).

      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).

       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.

      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, No. 98-3932 et al., 2000 WL 528069,
at *8 (7th Cir. May 2, 2000) (refusing to
interpret the term "another felony offense" in a
manner that would render superfluous the word
"another").

      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

      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.
