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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
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