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engaging in activities which generated losses in order to use
those losses to escape taxation on income from unrelated
activities. See Schaefer v. Commissioner, 105 T.C. at 230.
Section 469, which is generally effective for taxable years
beginning after December 31, 1986, TRA sec. 501(c)(1), 100 Stat.
2241, was designed by Congress to thwart a taxpayer's attempt to
reduce taxable income by losses which were attributable to
activities in which the taxpayer did not materially participate;
i.e., passive activities. Section 469 generally prevents a
taxpayer from deducting passive activity losses from income
unrelated to a passive activity, requiring that passive losses be
used only to offset passive income. A passive activity loss
includes all losses from passive activities, and a rental
activity is generally defined by section 469(c)(2) to be a
"passive activity". Passive income does not include certain
types of income such as portfolio income (i.e., interest,
dividends, annuities, or royalties), gain on the disposition of
property, and earned income. Sec. 469(e).
The linchpin of section 469 is the determination of each
activity in which a taxpayer participates, and Congress delegated
to the Commissioner the responsibility of prescribing the meaning
of the word "activity". See sec. 469(l)(1). The first set of
proposed regulations set forth a voluminous and complex
mechanical test for determining a taxpayer's activities. See
54 Fed. Reg. 20527, 20606 (May 12, 1989); see also sec. 1.469-4T,
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