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passive activity.-- In determining the income or loss
from any activity.--
(A) In general.-- There shall not be taken
into account–-
(i) any–
* * * * * * *
(II) expenses (other than interest)
which are clearly and directly allocable
to such gross income, and
(III) interest expense properly
allocable to such gross income * * *
In 1986, section 469(e) was enacted concurrently with
section 163(h)(2)(A). As originally enacted, section
163(h)(2)(A) read “incurred or continued in connection with the
conduct of” and was changed in 1988 to “properly allocable”.1
This was done in an effort to harmonize section 163(h)(2)(A) with
section 469(e).
When Congress enacted section 469(e) and later amended
section 163(h)(2)(A), it had the opportunity to place limits on
the relationship that an interest expense must bear to the
conduct of an active trade or business. Congress explicitly
limited the “clearly and directly allocable” standard to business
expenses and the “properly allocable” standard to interest
expenses. It reasonably can be inferred that “clearly and
1 The Technical and Miscellaneous Revenue Act of 1988,
Pub. L. 100-647, sec. 1005(c)(4), 102 Stat. 3342, 3390, H. Rept.
100-795, at 33-37 (1988).
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