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excluded portfolio income from the passive loss rules:
Portfolio investments ordinarily give rise to positive
income, and are not likely to generate losses which
could be applied to shelter other income. Therefore,
for purposes of the passive loss rule, portfolio income
generally is not treated as derived from a passive
activity, but rather is treated like other positive
income sources such as salary. To permit portfolio
income to be offset by passive losses or credits would
create the inequitable result of restricting sheltering
by individuals dependent for support on wages or active
business income, while permitting sheltering by those
whose income is derived from an investment portfolio.
[S. Rept. 99-313, supra, 1986-3 C.B. (Vol. 3) at 728.]
Income of a type generally regarded as portfolio income
which is derived in the ordinary course of a trade or business
does not fall within the definition of portfolio income. See
sec. 469(e)(1)(A); sec. 1.469-2T(c)(3)(i), Temporary Income Tax
Regs., 53 Fed. Reg. 5686, 5713 (Feb. 25, 1988). Congress and the
Secretary reasoned that “the rationale for treating portfolio-
type income as not from the passive activity does not apply [in
these instances], since deriving such income is what the business
activity actually, in whole or in part, involves.” S. Rept. 99-
313, supra, 1986-3 C.B. (Vol. 3) at 729. For example, banks
derive a large majority of their business income from interest.
See id. Under this rule, the bank would not treat the interest
as portfolio income. See id.
Parties’ Arguments
Petitioner claims that his gain is attributable to the
disposition of substantially appreciated property used in a
passive activity (his underwriting activity) for more than 20
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