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Petitioners timely filed a petition contesting respondent’s
determination, arguing that they qualified for an exception to
the passive loss rules because of the nature of the services AGI
provided and because of the number of hours petitioner wife spent
managing AGI. Petitioner wife also disputes respondent’s claim
that she worked full-time in her law practice, claiming that the
law practice income was mostly attributable to income earned on a
flat-fee basis or for work performed in prior years.
OPINION
Passive activity losses that exceed passive activity income
are generally disallowed. Sec. 469(a)(1), (d)(1). Passive
activities include the conduct of any trade or business
activities in which the taxpayer does not materially participate
and rental activities without regard to whether the taxpayer
materially participates. Sec. 469(c)(1), (2), (4); see also sec.
469(j)(8); sec. 1.469-1T(e)(1), Temporary Income Tax Regs., 53
Fed. Reg. 5702 (Feb. 25, 1988).3 A rental activity is any
activity where payments are principally for the use of tangible
property. Sec. 469(j)(8).
There are several exceptions to the definition of “rental
activity”, one of which petitioners assert applies.4 Sec. 1.469-
3The Commissioner is given authority under sec. 469(l) to
prescribe regulations to carry out the provisions of the section.
As relevant here, this statutory authority was carried out in
sec. 1.469-1T, Temporary Income Tax Regs., 53 Fed. Reg. 5701
(Feb. 25, 1988), sec. 1.469-5T, Temporary Income Tax Regs., 53
Fed. Reg. 5725 (Feb. 25, 1988), and sec. 1.469-9, Income Tax
Regs. See also sec. 7805.
4Petitioners also argued that the leasing activity was
nonpassive because petitioner wife qualified as a real estate
(continued...)
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