Rev. Proc. 74-8

Section 1. Purpose

The purpose of this Revenue Procedure is to clarify the second paragraph of section 4.04 of Rev. Proc. 72-18, 1972-1 C.B. 740, concerning the terms "portfolio investment" and "active conduct of a trade or business" as used in Rev. Proc. 72-18.

Sec. 2. Implementation

The second paragraph of section 4.04 of Rev. Proc. 72-18 is clarified to read as follows:

Portfolio investment for the purposes of this Revenue Procedure includes transactions entered into for profit (including investment in real estate) which are not connected with the active conduct of a trade or business. The purchase and sale of securities shall not constitute the active conduct of a trade or business unless the taxpayer is a dealer in securities within the meaning of section 1.471-5 of the Income Tax Regulations. A substantial ownership interest in a corporation engaged in the active conduct of a trade or business will not be considered a portfolio investment. For example, where a taxpayer owns 80 percent of the voting stock of a corporation that is engaged in the active conduct of a trade or business, the investment in such controlling interest will not be considered to be a portfolio investment. However, any ownership in a corporation not engaged in the active conduct of a trade or business will be considered a portfolio investment.

Substantial ownership in a corporation is a question of fact which will be determined on a case-by-case basis.

Sec. 3. Effect on Other Documents

Section 4.04, paragraph 2 of Rev. Proc. 72-18 is clarified to read as set forth in section 2.