Richard S. Holbrook - Page 5




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                    (2) Disqualified income.-–For purposes of paragraph               
               (1), the term “disqualified income” means-–                            
               ****** *                                                               
                         (C) * * *                                                    
                              (i) * * * [net] income from rents * * * not             
                         derived in the ordinary course of a trade or                 
                         business * * *. [Emphasis supplied.]                         
               In arguing that section 32(i) does not apply, petitioner               
          focused his argument on whether his real estate rental property             
          activity constituted a trade or business.  We believe, however,             
          that the inquiry is broader and that the correct focus should be            
          on the phrase “not derived in the ordinary course of a trade or             
          business”.  In considering the effect of this language we assume,           
          but do not decide, that petitioner’s real estate rental property            
          activity constituted a trade or business.                                   
               The relevant part of section 32(i) was added by section 4(a)           
          of Act of April 11, 1995, Pub. L. 104-7, 109 Stat. 93, 95.  The             
          legislative history of section 32(i) states that “The Committee             
          believes that the EITC should be targeted to families with the              
          greatest need.  Therefore, the Committee believes that it is                
          inappropriate to allow an EITC to taxpayers with significant                
          unearned income.”  S. Rept. 104-16, at 21 (1995).  In using the             
          phrase “not derived in the ordinary course of a trade or                    
          business”, the congressional focus, therefore, was on whether the           
          taxpayer had unearned income that exceeded the threshold amount.            







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