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“Passive activity”, however, generally includes any rental
activity, regardless of material participation. Sec. 469(c)(2).
Section 469 does not define “activity”. See Schwalbach v.
Commissioner, 111 T.C. 215, 223 (1998). The Secretary, however,
has prescribed regulations pursuant to section 469(l) that
specify what constitutes an “activity”. Section 1.469-4(c),
Income Tax Regs., sets forth rules for grouping tax items
together to determine what constitutes a single “activity”. That
regulation provides: “One or more trade or business activities
or rental activities may be treated as a single activity if the
activities constitute an appropriate economic unit for the
measurement of gain or loss for purposes of section 469.” Sec.
1.469-4(c)(1), Income Tax Regs. Whether activities constitute an
“appropriate economic unit” depends on the facts and
circumstances.5
Respondent concedes that petitioners’ grouping of the Bear
Valley Road property and the John Glenn Road property is an
appropriate economic unit. The parties, however, dispute the
5Sec. 1.469-4(c)(2), Income Tax Regs., provides:
(2) Facts and circumstances test. Except as
otherwise provided in this section, whether activities
constitute an appropriate economic unit and, therefore,
may be treated as a single activity depends upon all
the relevant facts and circumstances. A taxpayer may
use any reasonable method of applying the relevant
facts and circumstances in grouping activities * * *.
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Last modified: May 25, 2011