Assaf F. Al Assaf and Rehab Assaf - Page 5

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               Petitioners timely filed a petition contesting respondent’s            
          determination, arguing that they qualified for an exception to              
          the passive loss rules because of the nature of the services AGI            
          provided and because of the number of hours petitioner wife spent           
          managing AGI.  Petitioner wife also disputes respondent’s claim             
          that she worked full-time in her law practice, claiming that the            
          law practice income was mostly attributable to income earned on a           
          flat-fee basis or for work performed in prior years.                        
                                       OPINION                                        
               Passive activity losses that exceed passive activity income            
          are generally disallowed.  Sec. 469(a)(1), (d)(1).  Passive                 
          activities include the conduct of any trade or business                     
          activities in which the taxpayer does not materially participate            
          and rental activities without regard to whether the taxpayer                
          materially participates.  Sec. 469(c)(1), (2), (4); see also sec.           
          469(j)(8); sec. 1.469-1T(e)(1), Temporary Income Tax Regs., 53              
          Fed. Reg. 5702 (Feb. 25, 1988).3  A rental activity is any                  
          activity where payments are principally for the use of tangible             
          property.  Sec. 469(j)(8).                                                  
               There are several exceptions to the definition of “rental              
          activity”, one of which petitioners assert applies.4  Sec. 1.469-           

               3The Commissioner is given authority under sec. 469(l) to              
          prescribe regulations to carry out the provisions of the section.           
          As relevant here, this statutory authority was carried out in               
          sec. 1.469-1T, Temporary Income Tax Regs., 53 Fed. Reg. 5701                
          (Feb. 25, 1988), sec. 1.469-5T, Temporary Income Tax Regs., 53              
          Fed. Reg. 5725 (Feb. 25, 1988), and sec. 1.469-9, Income Tax                
          Regs.  See also sec. 7805.                                                  
               4Petitioners also argued that the leasing activity was                 
          nonpassive because petitioner wife qualified as a real estate               
                                                             (continued...)           




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