James V. and Judith M. Patterson - Page 6

                                        - 5 -                                         
               Section 162 allows deductions for ordinary and necessary               
          expenses incurred in carrying on a trade or business.  Section              
          469, however, limits the deductions for losses from any “passive            
          activity”.  A passive activity is any activity involving the                
          conduct of a trade or business in which the taxpayer does not               
          materially participate.  Sec. 469(c)(1).  As a general rule, any            
          “rental activity” is passive whether or not the taxpayer                    
          materially participates in the activity.  Sec. 469(c)(2), (4).              
          Under the regulations, the definition of rental activity does not           
          include an activity with respect to which the average period of             
          customer use of the property is 7 days or less.  Sec. 1.469-                
          1T(e)(3)(ii)(A), Temporary Income Tax Regs., 53 Fed. Reg. 5702              
          (Feb. 25, 1988).  The parties agree that petitioners’ rental of             
          the condominium unit in this case falls within this exclusion,              
          and the relevant issue is whether petitioners materially                    
          participated in the activity.                                               
               A taxpayer is treated as materially participating in an                
          activity only if the taxpayer is involved in the operations of              
          the activity on a regular, continuous, and substantial basis.               
          Sec. 469(h)(1).  A taxpayer can satisfy this requirement if he              
          meets any one of seven tests found in the regulations.  Sec.                
          1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb.            
          25, 1988).  One such test, the one which petitioners claim to               

Page:  Previous  1  2  3  4  5  6  7  8  Next

Last modified: May 25, 2011