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In the FPAA, respondent disallowed $422,410 in "other
deductions" (including the amounts paid as rollback taxes) as
claimed by SLR on the 1990 return, but allowed portfolio
deductions in the amount of $427,217 (which amount likewise
included the rollback taxes). It is of course indisputable that
under section 469(e)(1)(A)(i)(II) expenses clearly and directly
allocable to portfolio income may not be taken into account in
determining the income or loss from any passive activity, but
instead are allocable to "such gross income"--i.e., the portfolio
income--to which they relate.
It seems clear that the passive activity rules of section
469 interact with other Code provisions. We note in this
connection that the conference report to accompany TRA 1986
states:
Interaction with other Code sections.--It is
clarified that the passive loss rule applies to all
deductions that are from passive activities, including
deductions allowed under sections 162, 163, 164, and
165. For example, deductions for State and local
property taxes incurred with respect to passive
activities are subject to limitation under the passive
loss rule whether such deductions are claimed above-
the-line or as itemized deductions under section 164.
[H. Conf. Rept. 99-841 (Vol. 2), at II-139, 1986-3 C.B.
(Vol. 4) 139.]
In this case, it is the treatment of the Texas rollback
taxes that is in dispute. Therefore, if the portfolio income
provisions are involved as respondent maintains, then section
164, relating to deductions for taxes, interacts with section
469(e)(1)(A)(i)(II) to determine the proper allocation of the
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