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IV. Development of the Regulations Over Time
The recharacterization rule recharacterizes rental income
from property “rented for use in a trade or business activity * *
* in which the taxpayer materially participates * * * for the
taxable year”. Sec. 1.469-2(f)(6)(i), Income Tax Regs. During
1994, Mr. Krukowski rented the office building to the law firm.
Therefore, the recharacterization rule applies to petitioners’
income from the office building for that year only if Mr.
Krukowski materially “participated” in a trade or business
“activity” of the law firm during that year.
Because the law firm is a C corporation, we’re required to
decide whether a shareholder could participate in a trade or
business activity of his C corporation under the law applicable
to 1994. In 1988, 1989, 1992, and 1994, the Commissioner issued
temporary, proposed, or final regulations defining “activity” or
“material participation” for purposes of section 469. We must
therefore trace these regulations’ successive answers to that
question.
A. The 1988 Temporary Regulations
In 1988, the Commissioner issued the first section 469
regulations. See T.D. 8175, 1988-1 C.B. 191, 53 Fed. Reg. 5686
(Feb. 25, 1988) (the 1988 temporary regulations). The 1988
temporary regulations contained the first version of the
recharacterization rule (see sec. 1.469-2T(f)(6), Temporary
Income Tax Regs., 53 Fed. Reg. 5686, 5723 (Feb. 25, 1988)). That
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