Tony R. Carlos and Judith D. Carlos - Page 7

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          method for computing passive activity loss within the “activity”            
          grouping.                                                                   
               Section 469(d)(1) defines “passive activity loss” as “the              
          amount (if any) by which–-(A) the aggregate losses from all                 
          passive activities for the taxable year, exceed (B) the aggregate           
          income from all passive activities for such year.”  Passive                 
          activity loss is computed by first netting items of income and              
          loss within each passive activity and then subtracting aggregate            
          income from all passive activities from aggregate losses.  See              
          id.; sec. 1.469-2T, Temporary Income Tax Regs., 53 Fed. Reg. 5686           
          (Feb. 25, 1988).                                                            
               In carrying out the provisions of section 469, section                 
          469(l)(2) authorizes the Secretary to promulgate regulations                
          “which provide that certain items of gross income will not be               
          taken into account in determining income or loss from any                   
          activity (and the treatment of expenses allocable to such                   
          income)”.  While the general rule of section 469(c)(2)                      
          characterizes all rental activity as passive, section 1.469-                
          2(f)(6), Income Tax Regs., requires net rental income received by           
          the taxpayer for use of an item of the taxpayer’s property in a             
          business in which the taxpayer materially participates to be                
          treated as income not from a passive activity (sometimes referred           









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