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not deduct passive activity losses, except against passive
activity income. Sec. 469(a). Rental activities are generally
passive. Sec. 469(c)(2). The passive loss rules involve three
terms of art: "operations" are the most basic business unit under
the regulations; "undertakings" consist of one or more
"operations"; "activities" consist of one or more "undertakings".
Application of the rules hinges on a determination of whether the
taxpayer's "operations" can be combined into "undertakings" and
then into "activities" for the purpose of aggregating passive
income and passive losses, and active income and active losses.
This determination is made according to the rules set out in
section 1.469-4T, Temporary Income Tax Regs., 54 Fed. Reg. 20542-
20565 (May 12, 1989). This section is made applicable to the tax
years at issue by section 1.469-11(a)(2), Income Tax Regs.
The initial determination is whether each operation involved
is a separate undertaking. Each undertaking owned by a taxpayer
is usually then a separate and distinct activity. Sec.
1.469-4T(a)(4), (b)(1), Temporary Income Tax Regs., 54 Fed. Reg.
20542, 20543. In certain cases, however, a taxpayer may
aggregate its separate undertakings into a single activity. Sec.
1.469-4T(f),(k), Temporary Income Tax Regs., 54 Fed. Reg. 20552,
20561.
Operations that constitute a separate source of income are
treated as a single undertaking only if the operations are: (1)
conducted at the same location, and (2) owned by the same person.
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