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comply with the APA when he prescribed section 1.469-4(a), Income
Tax Regs.; if the Secretary had not complied with the APA, the
taxpayers argued, then the recharacterization rule was invalid as
applied to them. We concluded that the Secretary met the APA’s
requirements; in so doing, we analyzed the statutory text,
relevant legislative history, and various regulations prescribed
under section 469.
The taxpayers in Schwalbach also advanced an alternative
argument that is the same argument that petitioner advances
herein. The taxpayers in Schwalbach argued on brief:
in the event it is redetermined the provisions of
Treas. Reg. Sec. 1.469(d)(5) [sic] apply, the
provisions of Treas. Reg. Sec. 1.469-4T(b)(2)(ii)(B)
should be available to petitioners through 1994 due to
the continued confusion with respect to provisions of
the May, 1992, proposed regulations and the absence of
a definitive statement as regards a non-passthrough
entity not conducting passive activities through
itself. See, effective date and transition rules under
Treas. Reg. Sec. 1.469-11(b)(1).
We rejected this argument summarily, holding that nothing in
section 1.469-11, Income Tax Regs., allowed us to apply the
exception appearing in the pre-1992 regulations under which a
taxpayer would not be considered to be a material participant of
an activity conducted through a C corporation. See Schwalbach v.
Commissioner, supra at 230. We stated:
we decline petitioners' invitation to allow them to
apply the rules of section 1.469-4T(b)(ii)(B),
Temporary Income Tax Regs., 54 Fed. Reg. 20543, in lieu
of the rules stated in section 1.469-4(a), Income Tax
Regs. Simply put, the effective date and transition
rules related to the regulatory rules under section 469
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