Akshar owns 100% of Medplus, a C corporation, and 100% of Yes Reality, an S corporation. She worked full time for Medplus (i.e., he materially participated in the entity), but Akshar did not materially participate in Yes Reality. During the tax years 2015 through 2017, Yes Reality leased real estate to Medplus.

Akshar reported these rental amounts as passive activity income on his Schedule E, and he offset that income against passive activity losses from other entities. The IRS reclassified this rental income as non-passive income under Reg. § 1.469—2(f) (6). Who is right? Does § 469 apply to S corporations? Elaborate on the tax implications.