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losses from all passive activities for the taxable year over the
aggregate income from all passive activities for that year. Sec.
469(d)(1). Passive activities are those which involve the conduct
of a trade or business and in which the taxpayer does not
materially participate. Sec. 469(c)(1).
Rental activity ordinarily is treated as a passive activity
regardless of whether the taxpayer materially participates. Sec.
469(c)(2), (4). An exception exists for rental activity in which
the average rental does not exceed 7 days. Sec. 1.469-
1T(e)(3)(ii)(A), Temporary Income Tax Regs., 53 Fed. Reg. 5702
(Feb. 25, 1988). In the instant case, the parties agree that the
average rental did not exceed 7 days.
Petitioners contend that they materially participated in the
rental of both the Maui and Molokai condominiums, thus making
section 469(a) inapplicable. Material participation in an activity
is defined as regular, continuous, and substantial involvement.
Sec. 469(h)(1). The participation of a spouse is taken into
account in determining material participation. Sec. 469(h)(5).
A. Establishing Participation
As a preliminary matter, respondent asserts that petitioners
failed to substantiate the extent of their participation in the
rental of their condominiums in the manner contemplated by section
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