- 8 -
[was] needed to curb the expansion of tax sheltering." S. Rept.
99-313 (1986), 1986-3 C.B. (Vol. 3) 714. Portfolio income (which
includes gain from the sale of property held for investment, see
infra) is not treated as income from a passive activity because
such income, even net of expenses, generally will be positive and
thus could be used to benefit from tax shelter losses or credits.
S. Rept. 99-313, supra, 1986-3 C.B. (Vol. 3) at 728.
Section 469(e)(1)(A)(i)(II) provides that in determining
income or loss from a passive activity, expenses (other than
interest, which is treated separately), clearly and directly
allocable to portfolio income are not to be taken into account.
Section 1.469-2T(d)(4), Temporary Income Tax Regs., 53 Fed.
Reg. 5716 (Feb. 25, 1988), provides:
(4) Clearly and directly allocable expenses. For
purposes of section 469 and regulations thereunder, an
expense (other than interest expense) is clearly and
directly allocable to portfolio income (within the
meaning of paragraph (c)(3)(i) of this section) if and
only if such expense is incurred as a result of, or
incident to, an activity in which such gross income is
derived or in connection with property from which such
gross income is derived. * * *
There can be no dispute that the realized gain from the sale
of the Property is to be treated as portfolio income, since the
gain was not derived in the ordinary course of a trade or
business, but was attributable to the disposition of property
held for investment. Sec. 469(e)(1)(A)(ii)(II). The parties do
not disagree.
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