Alfredo A. and Jane R. Galagar - Page 6

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          real estate activities.  Section 469(i)(1) provides, in relevant            
          part, that “in the case of any natural person,” the passive                 
          activity loss disallowance under section 469(a) “shall not apply            
          to that portion of the passive activity loss * * * attributable             
          to all rental real estate activities with respect to which such             
          individual actively participated in such taxable year”.  Active             
          participation includes making management decisions or arranging             
          for others to provide services such as repairs.  Cf. Madler v.              
          Commissioner, T.C. Memo. 1998-112.                                          
               Section 469(i)(2) imposes a $25,000 limitation on section              
          469(i)(1).  But section 469(i)(3)(A) provides that “the $25,000             
          amount under paragraph (2) shall be reduced (but not below zero)            
          by 50 percent of the amount by which the adjusted gross income of           
          the taxpayer for the taxable year exceeds $100,000.”  Section               
          469(i)(3)(E)(iv) provides that “adjusted gross income shall be              
          determined without regard to * * * any passive activity loss”.              
               Assuming arguendo that petitioner actively participated in             
          his rental real estate activities during taxable year 1998,                 
          petitioner could claim the $25,000 offset allowed under section             
          469(i)(1), subject to a phaseout.  We find that the phaseout                
          under section 469(i)(3)(A) applies here.  On their 1998 Form                
          1040, petitioners reported wage income of $148,514, taxable                 
          interest of $402, and ordinary dividends of $21.  For purposes of           
          section 469(i)(3)(A) and (E), petitioners’ adjusted gross income            

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