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petitioners materially participated in the operation of their
Lake Arrowhead property during 1996 and 1997.
Section 469 generally disallows for the taxable year any
passive activity loss. Sec. 469(a). A passive activity loss is
defined as the excess of the aggregate losses from all passive
activities for the taxable year over the aggregate income from
all passive activities for that year. Sec. 469(d)(1). A passive
activity is any trade or business in which the taxpayer does not
materially participate. Sec. 469(c)(1). Rental activity is
treated as a per se passive activity regardless of whether the
taxpayer materially participates. Sec. 469(c)(2), (4). Under
section 469(c)(7)(B), the rental activities of a taxpayer in the
real property business (real estate professional) are not per se
passive activities under section 469(c)(2), but are treated as a
trade or business and subject to the material participation
requirement of section 469(c)(1). See also sec. 1.469-9(e)(1),
Income Tax Regs.
Real Estate Professional
Petitioners assert that they are entitled to deduct their
rental losses in 1997 and that such losses are not subject to the
passive activity loss limitations under section 469. Petitioners
contend that petitioner qualifies as a real estate professional
under section 469(c)(7) for 1997, and, thus, their rental
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