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passive losses.
General Background on the Passive Loss Rules
The section 469 passive loss rules were enacted as part of
the Tax Reform Act of 1986 (TRA '86), Pub. L. 99-514, 100 Stat.
2085, in response to the Congressional belief that “decisive
action * * * [was] needed to curb the expansion of tax
sheltering”. S. Rept. 99-313 (1986), 1986-3 C.B. (Vol. 3) 713,
714. Those rules were specifically designed to prevent a
taxpayer from using losses from a passive activity to offset
unrelated income generated in a nonpassive activity. See Hillman
v. Commissioner, 114 T.C. 103, 107 (2000).
A passive activity is defined as a trade or business in
which the taxpayer does not materially participate. See sec.
469(c)(1). Section 469 generally disallows a taxpayer’s passive
activity loss or credit. See sec. 469(a). A taxpayer’s passive
activity loss is the amount by which the aggregate losses from
all passive activities for the taxable year exceed the aggregate
gains from all passive activities for such year. See sec.
469(d)(1).
Income from passive activities, i.e., passive activity gross
income, includes an item of gross income if and only if such
income is from a passive activity. See sec. 1.469-2T(c)(1),
Temporary Income Tax Regs., 53 Fed. Reg. 5686, 5711 (Feb. 25,
1988). In determining how to treat the gain from the disposition
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