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Passive Activity Loss Issue
The next issue is whether petitioners’ claimed losses for
the taxable years 1988 through 1990 from two subchapter S
corporations, Gateway and Maximo, constitute passive activity
losses as defined in section 469. Pursuant to section 469(a), a
passive activity loss of an individual for the taxable year is
generally not allowed as a deduction. A passive activity is
defined as a trade or business in which the taxpayer does not
materially participate. Sec. 469(c)(1). Section 469(h)(1)
provides that an individual shall be treated as materially
participating in an activity only if he or she is involved in the
operations of the activity on a basis that is regular,
continuous, and substantial. The regulations contain seven safe
harbor provisions under which an individual will be treated as
materially participating in an activity. Sec. 1.469-5T(a),
Temporary Income Tax Regs., 53 Fed. Reg. 5725-5726 (Feb. 25,
1988).
Petitioners rely on section 1.469-5T(a)(4), Temporary Income
Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988), which provides:
The activity is a significant participation activity
* * * for the taxable year, and the individual’s
aggregate participation in all significant
participation activities during such year exceeds 500
hours;
A significant participation activity is defined as a trade or
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