Stephen and Ann Schwalbach - Page 13

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          engaging in activities which generated losses in order to use               
          those losses to escape taxation on income from unrelated                    
          activities.  See Schaefer v. Commissioner, 105 T.C. at 230.                 
          Section 469, which is generally effective for taxable years                 
          beginning after December 31, 1986, TRA sec. 501(c)(1), 100 Stat.            
          2241, was designed by Congress to thwart a taxpayer's attempt to            
          reduce taxable income by losses which were attributable to                  
          activities in which the taxpayer did not materially participate;            
          i.e., passive activities.  Section 469 generally prevents a                 
          taxpayer from deducting passive activity losses from income                 
          unrelated to a passive activity, requiring that passive losses be           
          used only to offset passive income.  A passive activity loss                
          includes all losses from passive activities, and a rental                   
          activity is generally defined by section 469(c)(2) to be a                  
          "passive activity".  Passive income does not include certain                
          types of income such as portfolio income (i.e., interest,                   
          dividends, annuities, or royalties), gain on the disposition of             
          property, and earned income.  Sec. 469(e).                                  
               The linchpin of section 469 is the determination of each               
          activity in which a taxpayer participates, and Congress delegated           
          to the Commissioner the responsibility of prescribing the meaning           
          of the word "activity".  See sec. 469(l)(1).  The first set of              
          proposed regulations set forth a voluminous and complex                     
          mechanical test for determining a taxpayer's activities.  See               
          54 Fed. Reg. 20527, 20606 (May 12, 1989); see also sec. 1.469-4T,           

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