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600 (5th Cir. 1999); thus, it is invalid only if it is arbitrary,
capricious, or manifestly contrary to the statute, see Chevron,
U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837, 844 (1984); see also McKnight v. Commissioner, 99 T.C. 180,
183 (1992).
The rechacterization rule is not arbitrary, capricious, or
manifestly contrary to the statute.3 It was prescribed by the
Secretary pursuant in part to the specific grant of authority
stated in section 469(l) that allows him to prescribe all
necessary or appropriate regulations to carry out the provisions
of section 469, including regulations: (1) Defining the terms
“activity” and “material participation”, sec. 469(l)(1), and (2)
“requiring net income or gain from a limited partnership or other
passive activity to be treated as not from a passive activity”,
sec. 469(l)(3). The rule is tied directly to the following
passage set forth by the conferees in their report as to the
Secretary’s regulatory authority under section 469:
Regulatory authority of Treasury in defining non-
passive income.--The conferees believe that
clarification is desirable regarding the regulatory
authority provided to the Treasury with regard to the
definition of income that is treated as portfolio
income or as otherwise not arising from a passive
activity. The conferees intend that this authority be
exercised to protect the underlying purpose of the
passive loss provision, i.e., preventing the sheltering
3 The Court of Appeals for the Fifth Circuit has so
concluded. See Fransen v. United States, 191 F.3d 599 (5th Cir.
1999).
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