Edward C. and Susan R. Hanna - Page 14

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          real estate professional, we need not consider whether she                  
          materially participated in the rental activities.  See sec.                 
               Although petitioners did not raise the issue, we note that             
          section 469(i) provides an exception to the general rule that               
          passive activity losses are disallowed.  A taxpayer who                     
          “actively participates” in a rental real estate activity can                
          deduct a maximum loss of $25,000 per year related to the                    
          activity.  Sec. 469(i)(1) and (2).  This exception is fully                 
          phased out, however, when adjusted gross income (AGI) equals or             
          exceeds $150,000.  Sec. 469(i)(3)(A), (E).  Petitioners reported            
          AGI of $179,359.2  Accordingly, they cannot deduct any amount of            

          Hanna testified that overbilling was common among computer                  
          consultants in her position, this practice raises the question of           
          whether she also inflated the hours reflected in the narrative              
               2 Under sec. 469(i)(3)(E)(iv), adjusted gross income (AGI)             
          is determined without regard to any passive activity loss or any            
          loss allowable by reason of sec. 469(c)(7).  We do not address              
          the application of sec. 469(i)(3)(E)(iv) to the present case                
          because the AGI that petitioners reported already exceeds the               
          $150,000 limitation.                                                        

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