this is what IRC 1411 says
The term “net investment income” means the excess (if any) of—
(A)the sum of—
(i)gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in paragraph (2),
(ii)other gross income derived from a trade or business described in paragraph (2), and
(iii)net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business not described in paragraph (2), over
(B)the deductions allowed by this subtitle which are properly allocable to such gross income or net gain.
(2)Trades and businesses to which tax applies
A trade or business is described in this paragraph if such trade or business is—
(A)a passive activity (within the meaning of section 469) with respect to the taxpayer, or
(B)a trade or business of trading in financial instruments or commodities (as defined in section 475(e)(2)).
iRC 469(c)
(c)Passive activity defined
For purposes of this section—
(1)In general
The term “passive activity” means any activity—
(A)which involves the conduct of any trade or business, and
(B)in which the taxpayer does not materially participate.
reg 1.1411-5
2) Application of income recharacterization rules -
(i) Income and gain recharacterization. To the extent that any income or gain from a trade or business is recharacterized as “not from a passive activity” by reason of § 1.469-2T(f)(2), § 1.469-2(f)(5), or § 1.469-2(f)(6), such trade or business does not constitute a passive activity within the meaning of paragraph (b)(1)(ii) of this section solely with respect to such recharacterized income or gain.
(ii) Gain recharacterization. To the extent that any gain from a trade or business is recharacterized as “not from a passive activity” by reason of § 1.469-2(c)(2)(iii) and does not constitute portfolio income under § 1.469-2(c)(2)(iii)(F), such trade or business does not constitute a passive activity within the meaning of paragraph (b)(1)(ii) of this section solely with respect to such recharacterized gain.
(iii) Exception for certain portfolio recharacterizations. To the extent that any income or gain from a trade or business is recharacterized as “not from a passive activity” and is further characterized as portfolio income under § 1.469-2(f)(10) or § 1.469-2(c)(2)(iii)(F), then such trade or business constitutes a passive activity within the meaning of paragraph (b)(1)(ii) of this section solely with respect to such recharacterized income or gain.
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