- 53 -
More importantly, notwithstanding any contrary inferences
that might have been drawn, it is clear that the activity
definition contained in the 1994 final regulations was the first
activity rule expressly providing that a shareholder participated
in his C corporation’s activities. I repeat the observation we
made in Schwalbach v. Commissioner, 111 T.C. at 226, about the
new 1994 activity definition:
the change in language from the proposed regulations
was substantial; up until the final regulations, the
Commissioner had not publicly taken the position that
an individual’s activities could include activities
conducted through a C corporation.
I also repeat that in Schwalbach we never questioned that this
1994 change was a prerequisite to the recharacterization of
rental income received by the shareholder of a C corporation.
In promulgating the 1994 final regulations containing this
substantial change, the Commissioner once again recognized the
importance of transitional relief. The 1994 final regulations
provided that taxpayers could determine their tax liability for
years ending after May 10, 1992, and beginning before October 4,
1994, under the 1992 proposed regulations if they so chose,
rather than under the final regulations. See 59 Fed. Reg. 50485,
50486-50487 (Oct. 4, 1994).
It would be inconsistent with this grant of transitional
relief to hold to their detriment that shareholders participated
in the activities of their C corporations under the 1992 proposed
regulations. Taxpayers could not learn or infer, from reading
Page: Previous 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 NextLast modified: May 25, 2011