Henry Peter Novick and Carolyn S. Novick - Page 3

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          of Sacramento Sierra Medical Group; petitioner Carolyn Novick was           
          a housewife.                                                                
          Schedule E Rental Losses                                                    
               During each of the years under consideration, petitioners              
          reported income and expenses  attributable  to  three  rental               
          activities on Schedule E of their tax returns:  The Texas rental,           
          the Tahoe rental, and the F Street (Sacramento) Duplex rental.              
          Respondent disallowed numerous expenses claimed by petitioners with         
          respect to each of these rental properties and recalculated                 
          petitioners' net Schedule E gain/loss after applying the passive            
          activity loss rules.2  Petitioners do not dispute the application           
          of the passive activity loss rules to the rental expenses claimed           
          on Schedule E of their tax returns.  The following tables show the          
          income/loss reported by petitioners and the amounts allowed by              
          respondent with respect to each of the three rental properties,             
          before application of the passive activity loss rules (hereafter            
          referred to as Pre-Pals):                                                   


               2    Pursuant to sec. 469(a), a passive activity loss is               
          generally not allowed as a deduction for the year sustained.                
          Sec. 469(d)(1) defines a passive activity loss as the amount by             
          which (A) the aggregate losses from all passive activities for              
          the taxable year exceed (B) the aggregate income from all passive           
          activities for that year.  Passive activities are those                     
          activities that involve the conduct of a trade or business in               
          which the taxpayer does not materially participate.  Sec.                   
          469(c)(1).  Rental activity ordinarily is treated as a passive              
          activity irrespective of whether there is material participation.           
          Sec. 469(c)(2), (4).                                                        






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