Bruce and Judy Bailey - Page 8

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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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