The legal reasoning behind the classification of portfolio income as non-passive is rooted in the Internal Revenue Code (IRC) and Treasury Regulations. According to Subsection 469(e)(1) of the IRC, certain types of income are not treated as income from passive activity. This includes gross income from interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business, as well as gain or loss not derived in the ordinary course of a trade or business which is attributable to the disposition of property producing income of a type described in clause (i), or held for investment.
This is further clarified in the Treasury Regulations, specifically § 1.469-2T. Passive activity loss (temporary), which states that passive activity gross income does not include portfolio income. For the purposes of this regulation, portfolio income includes all gross income, other than income derived in the ordinary course of a trade or business, that is attributable to interest, dividends, annuities, or royalties.However, it's important to note that there are exceptions to this general rule. For instance, Temp. Treas. Reg. section 1.469-2T(c)(3)(ii) defines the phrase 'gross income derived in the ordinary course of a trade or business' and provides specific situations where the items of gross income described in section 1.469-2T(c)(3)(i) are considered derived in the ordinary course of a trade or business, and thus are not portfolio income for the purposes of section 469.In conclusion, portfolio income is generally considered non-passive. However, there are specific exceptions where certain types of income, even if they fall under the general definition of portfolio income, may be considered as derived in the ordinary course of a trade or business and thus not treated as portfolio income.
Sources:
PLR 9037027
§ 469. Passive activity losses and credits limited
PLR 199924023
PLR 199924022
§ 1.469-2T. Passive activity loss (temporary).
PLR 199924020
TAM 200010004
TAM 9209004
T.D. 9013
FSA 200002015
