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corporations. The effect of this silence on the application of
the recharacterization rule is what’s in issue in this case.
D. The 1994 Final Regulations
In 1994, the Commissioner issued T.D. 8565, 1994-2 C.B. 81,
59 Fed. Reg. 50485 (Oct. 4, 1994) (the 1994 final regulations).
The 1994 final regulations didn’t change the participation
definition adopted at the time of the 1992 proposed regulations.
However, the 1994 final regulations substantially revised the
1992 proposed regulations’ activity definition, by adding the
following statement to the “scope and purpose” provision: “A
taxpayer’s activities include those conducted through C
corporations that are subject to section 469, S corporations, and
partnerships.” Sec. 1.469-4(a), Income Tax Regs. As a result of
this change, it was clear that a shareholder would materially
participate in the activities of his C corporations under the
1994 final regulations-–even though the participation definition
itself was not affected.
The following table summarizes the development over time of
the activity and material participation definitions in the
section 469 regulations, as described above. It also notes
whether, as a result of those definitions, a shareholder could
participate in the activities of his C corporations.
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