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report as to the Secretary’s regulatory authority under
section 469:
Regulatory authority of Treasury in defining
non-passive income.--The conferees believe that
clarification is desirable regarding the regulatory
authority provided to the Treasury with regard to the
definition of income that is treated as portfolio
income or as otherwise not arising from a passive
activity. The conferees intend that this authority be
exercised to protect the underlying purpose of the
passive loss provision, i.e., preventing the sheltering
of positive income sources through the use of tax
losses derived from passive business activities.
Examples where the exercise of such authority may
(if the Secretary so determines) be appropriate include
the following * * * (2) related party leases or
sub-leases, with respect to property used in a business
activity, that have the effect of reducing active
business income and creating passive income * * *.
[H. Conf. Rept. 99-841 (Vol. II), at II-147, 1986-3
C.B. (Vol.4) 1, 147.]
As the Court of Appeals for the First Circuit stated in Sidell v.
Commissioner, 225 F.3d at 107:
The authority given to the Secretary, as
illustrated by the statutory text, is quite broad. The
statute empowers him to promulgate any regulations that
he deems “necessary or appropriate” to further the
goals of section 469. Importantly, this includes the
explicit power to treat what normally would be passive
income as nonpassive if he believes that such a shift
is warranted.
As the Court of Appeals for the Fifth Circuit stated in Fransen
v. United States, supra at 600-601:
Here, the parties dispute the scope of passive
activity the IRS may treat as non-passive. The point
of uncertainty lies with the word “other” in
� 469(l)(3). The Fransens suggest that “other” refers
to activity not elsewhere defined in � 469 as passive.
Grammatically, however, the more persuasive reading of
the provision is that a regulation may treat any kind
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