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all, however, the content of these successive regulations
demonstrates that the majority’s “plain meaning” interpretation
of the statute and the recharacterization rule is incorrect.
The majority conclude that shareholders participate in C
corporation activities under the plain meaning of section 469 and
the recharacterization rule. The fatal flaw of this conclusion
is that the Commissioner reached the opposite conclusion in the
section 469 regulations–-not once but twice.
In 1988 and 1989, the Commissioner was faced with the same
statutory language. And yet, during those years the Commissioner
interpreted that language--in temporary regulations having the
force of law--to conclude that shareholders did not participate
in C corporation activities. See the discussion of the 1988 and
1989 temporary regulations infra pp. 30-34.
The majority do not argue (or even dare to suggest) that the
express nonparticipation (or nonattribution) rules set forth in
the temporary regulations were invalid interpretations of the
statute. Moreover, none of the parties litigating (or courts
considering) the application of the recharacterization rule to C
corporation shareholders has ever argued or concluded that the
temporary regulations were invalid in this respect. The
9(...continued)
this regulation to “sunset” under sec. 7805(e), partly as a
result of public criticism that it was overly long and complex,
burdensome for small taxpayers, and mechanically inflexible. See
Schwalbach v. Commissioner, 111 T.C. 215, 224 (1998).
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