- 8 -
from structuring dispositions in a manner that would generate
passive activity gross income in inappropriate situations. See
T.D. 8175, 1988-1 C.B. 191, 196. Without this exception, a
taxpayer could transfer substantially appreciated property used
in a nonpassive activity to a passive activity just prior to
disposition, thereby converting nonpassive gain into passive gain
to be offset by passive losses.
Section 469(e)(1)(A) and the applicable regulations
thereunder provide that certain income will not be treated as
income from a passive activity including (1) any gross income
from interest, dividends, annuities, or royalties not derived in
the ordinary course of a trade or business, and (2) any gain or
loss not derived in the ordinary course of a trade or business
which is attributable to the disposition of property producing
income of a type described in (1) or property held for investment
(the portfolio income exception). The temporary regulations
refer to this type of income as portfolio income. See sec.
1.469-2T(c)(3)(i), Temporary Income Tax Regs., 53 Fed. Reg. 5686,
5713 (Feb. 25, 1988); see also Schaefer v. Commissioner, 105 T.C.
227, 230 (1995).
The legislative history sheds some light on why Congress
4(...continued)
Temporary Income Tax Regs., 54 Fed. Reg. 20527, 20538 (May 12,
1989). In 1992, the temporary regulation was finalized without
change. See sec. 1.469-2(c)(2)(iii), Income Tax Regs., 57 Fed.
Reg. 20747, 20754 (May 15, 1992); T.D. 8417, 1992-1 C.B. 173,
181-183.
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