- 23 -
not arbitrary, capricious, or manifestly contrary to the statute.
Krukowski v. Commissioner, 114 T.C. 366, 369-370 (2000);
Schwalbach v. Commissioner, 111 T.C. 215, 219-224 (1998); see
also Sidell v. Commissioner, T.C. Memo. 1999-301, affd. 225 F.3d
103 (1st Cir. 2000). Congress granted the Secretary of the
Treasury the authority to prescribe regulations as may be
necessary or appropriate to carry out the provisions of section
469, including regulations “which specify what constitutes an
activity, material participation, or active participation for
purposes of this section, * * * [and] requiring net income or
gain from a limited partnership or other passive activity to be
treated as not from a passive activity”. Sec. 469(l)(1), (3).
In Krukowski v. Commissioner, supra at 369, the Court stated:
We disagree with petitioner that the
recharacterization rule is invalid. The
recharacterization rule is a legislative regulation,
see Schwalbach v. Commissioner, 111 T.C. 215, 220
(1998) (the Secretary had to comply with the
Administrative Procedure Act (APA), 5 U.S.C. sec.
553(b) and (c) (1994), when he prescribed sec. 1.469-
2(f)(6), Income Tax Regs., because the rules contained
therein are legislative rather than interpretive); see
also Fransen v. United States, 191 F.3d 599, 600 (5th
Cir. 1999); thus, it is invalid only if it is
arbitrary, capricious, or manifestly contrary to the
statute, see Chevron, U.S.A., Inc. v. Natural Resources
Defense Council, Inc., 467 U.S. 837, 844 (1984); see
also McKnight v. Commissioner, 99 T.C. 180, 183 (1992)
[affd. 7 F.3d 182 (5th Cir. 1993)].
The recharacterization rule is not arbitrary,
capricious, or manifestly contrary to the statute. It
was prescribed by the Secretary pursuant in part to the
specific grant of authority stated in section 469(l)
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