- 10 -
activities from its purview. Where a taxpayer "materially
participates" in a trade or business, the activity is excluded from
being classified as "passive". Sec. 469(c)(1). Ultimately,
neither a passive activity loss nor a passive activity credit is
permanently disallowed. Rather, they are suspended until the
taxpayer either has offsetting passive income or disposes of his
entire interest in the passive activity. See sec. 469(b), (g).
The passive activity rules reflect Congress' concern over the
widespread use of tax shelters that allowed taxpayers to avoid
paying tax on unrelated income. See Schaefer v. Commissioner, 105
T.C. 227, 230 (1995). In large part, section 469 was intended to
"restore public confidence in the Federal tax system" by limiting
the ability of taxpayers to derive tax preferences from activities
in which they did not have a "substantial and bona fide
involvement". Adler v. United States, 32 Fed. Cl. 736, 738 (1995);
see S. Rept. 99-313, at 713 (1986), 1986-3 C.B. (Vol. 3) 1, 713-
714; see also St. Charles Inv. Co. v. Commissioner, 110 T.C. 46,
49-50 (1998). As noted previously, pursuant to section 469,
passive losses are allowed only to the extent of passive income.
Congress gave the Secretary broad authority to promulgate rules and
regulations under section 469. See Schwalbach v. Commissioner, 111
T.C. 215, 220 (1998),3 wherein this Court held that neither the
3 In Schwalbach v. Commissioner, 111 T.C. 215 (1998), the
(continued...)
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011