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by a taxpayer in an activity involving the conduct of a trade or
business “which is not a passive activity” and with respect to
which the taxpayer does not “materially participate”, as the
terms are used in section 469. Sec. 163(d)(5)(C).
Respondent agrees that the interest paid to Wilmington Trust
is interest on petitioner’s investment in silver coins.
Respondent contends, however, that petitioners’ deduction is
limited to the amount of the “investment income”, which is zero.
Petitioners maintain that the net rental income received and
reported on Schedule E, Supplemental Income and Loss, constitutes
investment income.
In this regard, petitioners must contend that, as “property
held for investment”, their rental real estate properties were
held in a trade or business activity “with respect to which * * *
[petitioner] does not materially participate.” Sec.
163(d)(5)(A)(ii)(II). Material participation is defined by
section 469(h)(1) as an involvement in the operation of the
activity on a regular, continuous, and substantial basis. See
also sec. 1.469-5T, Temporary Income Tax Regs., 53 Fed. Reg. 5727
(Feb. 25, 1988). By his own admission, petitioner spends over 30
hours per week operating and maintaining the rental apartments,
and he is responsible for all the administrative duties
associated with the rental properties. From the facts in this
record it is clear that petitioner materially participates in the
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Last modified: May 25, 2011