Hoora Rahimi and Isaac William Hammond - Page 10

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          expenses claimed on the ARA Schedule C.  See sec. 6001; sec.                
          1.6001-1(a), (e), Income Tax Regs.  The Court sustains                      
          respondent's disallowance of the ARA Schedule C deductions.                 
          B.  Schedule E Rental Real Estate Losses                                    
               Petitioners reported a rental real estate loss of $2,635               
          from the rental of their property in Georgia.  They applied the             
          loss against petitioner's wages from Eli Lilly.  Respondent                 
          disallowed the loss.                                                        
               Section 469 generally prevents a taxpayer from deducting               
          passive activity losses from income unrelated to a passive                  
          activity, requiring that passive losses be used only to offset              
          passive income.  Sec. 469; Schwalbach v. Commissioner, 111 T.C.             
          215, 223 (1998).  A taxpayer's right to make use of passive                 
          activity losses in any year is limited to the amount of the                 
          taxpayer's passive activity income for that year.  Sec. 469(a),             
          (d)(1).  Amounts disallowed may be carried forward to subsequent            
          years.  Sec. 469(b).  Subject to exceptions not relevant here, a            
          passive activity loss includes all losses from passive                      
          activities, and a rental activity is defined by section 469(c)(2)           
          to be a "passive activity".                                                 
               Although petitioners are not entitled to offset the rental             
          real estate loss against petitioner's wages, section 469(i)                 
          allows a taxpayer to claim up to $25,000 per year in passive                
          activity losses from rental real estate activities in which the             






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