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1994 final activity regulation, we never questioned that that
regulation was a prerequisite to the application of the
recharacterization rule. Indeed, if shareholders clearly
participated in C corporation activities under the plain meaning
of the statute and the recharacterization rule, as the majority
now contend, Schwalbach’s analysis and upholding of the 1994
final “activity” regulation would be dictum.7
Most importantly, the majority’s plain meaning approach is
fundamentally inconsistent with the repeated efforts the
Commissioner has found it necessary to exert, through issuance of
different regulations, simply to interpret and apply the
assertedly “plain” language of section 469.
As the majority correctly observe, section 469 defines
“material participation” generally. Sec. 469(h). That section,
however, neither defines a taxpayer’s “activities”, nor expressly
7 Of course, in Sidell v. Commissioner, T.C. Memo. 1999-301,
and Connor v. Commissioner, T.C. Memo. 1999-185, we did conclude
that sec. 1.469-2(f)(6), Income Tax Regs. (the recharacterization
rule), could be applied to C corporation shareholders where the
regulations promulgated in T.D. 8565, 1994-2 C.B. 81, 59 Fed.
Reg. 50485 (Oct. 4, 1994) (the 1994 final regulations), and the
regulations promulgated in Notice of Proposed Rulemaking, PS-1-
89, 1992-1 C.B. 1219, 57 Fed. Reg. 20802 (May 15, 1992) (the 1992
proposed regulations), applied. I believe those decisions should
no longer be followed. As I explain in the text below, the 1992
proposed regulations, properly interpreted, prevent shareholder
participation in C corporation activities.
In any event, the majority rely little on Sidell and Connor
for their conclusion; perhaps this is because the majority’s view
of the governing law is so fundamentally different from the views
expressed in those opinions.
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