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C. The Express Participation Rule of the 1994 Final
Regulations Did Not “Clarify” the 1992 Proposed
Regulations
To support the position that shareholders participate in C
corporation activities under the 1992 proposed regulations,
respondent additionally argued that the express participation
rule of the 1994 final regulations simply “clarified” the 1992
proposed regulations. This is also incorrect.
The 1994 final regulations included the following sentence
dealing with the “scope and purpose” of the activity definition:
“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. (the express
participation (or attribution) rule). It is true that the
preamble to the 1994 final regulations stated that this language
17(...continued)
Inc., 508 U.S. 439 (1993), concerned a national bank’s ability to
sell insurance. In the Court of Appeals’ view, section 24 of the
National Bank Act, 12 U.S.C. sec. 24 (1988), limited banks’
activities to those expressly authorized by law. Starting from
this premise, it of course followed, after Congress omitted the
section of the banking laws authorizing banks to sell insurance,
that banks no longer had the power to do so.
The majority assert that an express nonattribution rule is
necessary to prevent shareholder participation in C corporation
activities. As made clear in the text, this is incorrect. The
Commissioner’s interpretations of the statute in both sets of
temporary regulations, the Commissioner’s inclusion of an express
participation rule in the 1994 final regulations, and our
decision in Schwalbach v. Commissioner, 111 T.C. 215 (1998),
treating the 1994 final regulations as necessary, all suggest
that shareholders do not participate in C corporation activities,
under the plain meaning of section 469.
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