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The Commissioner has long recognized the value of effective
date and transitional rule relief in the section 469 setting.
When the recharacterization rule was first promulgated as part of
the 1988 temporary regulations, the Commissioner ensured it would
not be applied retroactively, because “taxpayers could not
clearly foresee the particular recharacterization rules that
these regulations would adopt”. See T.D. 8175, 1988-1 C.B. 191,
53 Fed. Reg. 5686 (Feb. 25, 1988), at “Supplementary Information:
Significant Policy Issues; XVI. Recharacterization of Certain
Passive Activity Gross Income”. Also, when the Commissioner
allowed the activity definition in the 1989 temporary regulations
to “sunset” he published the 1992 proposed regulations to take
its place; the 1992 proposed regulations stated that they would
apply only to tax years ending after their date of publication.
See Notice of Proposed Rulemaking, PS-1-89, 57 Fed. Reg. 20802,
20803 (May 15, 1992).
The 1988 and 1989 temporary regulations expressly provided
that a shareholder could not participate in the activities of his
C corporations. By contrast, the 1992 proposed regulations were
silent on this issue. For the reasons set forth above, taxpayers
could not have inferred from this silence that the Commissioner
had changed the prior rules to provide that shareholders
participate in the activities of their C corporations under the
1992 proposed regulations.
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