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temporary regulations no longer expressly stated that a
shareholder could not participate in the activities of his C
corporations.
At first blush, one might think that this elimination of
restrictive language–-and the resulting silence about whether
individuals could participate in their indirectly owned
activities-–might mean that individuals could participate in the
activities of all their entities, including C corporations.
However, this was not the case. The new definition of “activity”
contained in section 1.469-4T of the 1989 temporary regulations
expressly provided that a shareholder did not participate in the
activities of his C corporations.13 As a result of this new
13 New sec. 1.469-4T of the 1989 temporary regulations
defined activity for purposes of the passive loss rules. See
sec. 1.469-4T, Temporary Income Tax Regs., 54 Fed. Reg. 20527,
20542 (May 12, 1989). Sec. 1.469-4T(b)(2)(ii)(B) of those
regulations provided that for purposes of section 469 and the
regulations thereunder “a taxpayer’s activities do not include
operations that a taxpayer conducts through one or more entities
(other than passthrough entities).” Id. at 20543. Sec. 1.469-
4T(b)(2)(i) in turn defined “passthrough entity”; that definition
did not include C corporations. Id. at 20543.
A shareholder’s inability to participate in the activities
of his C corporations under the cited provisions was made clear
by the example accompanying section 1.469-4T(b)(2) of the 1989
temporary regulations. In the facts of that example, taxpayer A
owned stock of closely held corporation X. The example stated:
X is a C corporation and therefore is not a passthrough
entity. Thus, for purposes of section 469 and the
regulations thereunder, A’s activities do not include
the operations of X’s real estate development business.
Accordingly, A’s participation in X’s business is not
participation in an activity of A, and is not taken
(continued...)
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