In 1986, Congress enacted the passive loss rules barring the deduction of passive trade or business losses to the extent deductions exceed income from all passive activities (exclusive of portfolio income) against other income. It was widely agreed that the limits on deductibility of passive losses would be met by attempts to generate passive income to absorb the passive losses. As a consequence, the Department of the Treasury used its rule making power to identify specific income areas which would produce non-passive income.
"Recharacterization Of Income: Treacherous Rules,"
Agricultural Law Digest: Vol. 11
, Article 1.
Available at: http://lib.dr.iastate.edu/aglawdigest/vol11/iss5/1