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The majority’s “plain reading” of section 469 and the
recharacterization rule is also inconsistent with our precedent.
In Schwalbach v. Commissioner, 111 T.C. 215 (1998), Sidell v.
Commissioner, T.C. Memo. 1999-301, and Connor v. Commissioner,
T.C. Memo. 1999-185, we considered the application of the
recharacterization rule to C corporation shareholders. None of
these opinions relied on the plain meaning of section 469 or of
the recharacterization rule. To the contrary, all three opinions
treated the 1994 final regulations (and the 1992 proposed
regulations made applicable thereby) as the governing law.
Our Schwalbach decision is a striking example of the
importance we have attributed to the 1994 final activity
regulation in this context. In Schwalbach, respondent applied
the recharacterization rule to a C corporation shareholder. The
taxpayers’ primary argument was that this application was
invalid, because: (1) The 1994 final regulation defining
“activity” was a prerequisite to the application of the
recharacterization rule to a C corporation shareholder; and (2)
the recharacterization rule and the 1994 final activity
regulation were invalid for failure to comply with the notice and
comment procedures of the Administrative Procedure Act, 5 U.S.C.
sec. 553(b) and (c) (1994). See Schwalbach v. Commissioner,
supra at 219.
In the course of Schwalbach’s detailed analysis of the
protracted regulatory process that ultimately gave rise to the
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