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application of section 1.469-2(f)(6), Income Tax Regs., to
recharacterize specific items of income, leaving remaining items
of passive loss with no offset.
In the instant case, we conclude that activity grouping does
not preempt the application of section 1.469-2(f)(6), Income Tax
Regs. To hold otherwise would undermine the congressional
purpose for enacting section 469 and authorizing section 1.469-
2(f)(6), Income Tax Regs., to wit: the prevention of sheltering
of nonpassive income with passive losses. H. Conf. Rept. 99-841
(Vol. II), at II-147 (1986), 1986-3 C.B. (Vol. 4) 1, 147. The
conference report accompanying section 469 describes this
legislative purpose:
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 * * *. [Id.]
11(...continued)
469(l)(3).
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