Carolyn D. Fenderson - Page 8

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          passive activities unless the requirements of section 469(c)(7)             
          * * * are met”.  Other adjustments made in the notice of                    
          deficiency are not in dispute.                                              
               In general and as relevant here, an individual is not                  
          entitled to a deduction for a passive activity loss incurred                
          during the taxable year.  Sec. 469(a).  A passive activity loss             
          is defined as the excess of the aggregate losses from all passive           
          activities for the taxable year over the aggregate income from              
          all passive activities for that year.  Sec. 469(d)(1).  A passive           
          activity is any activity which involves the conduct of any trade            
          or business and in which the taxpayer does not materially                   
          participate.  Sec. 469(c)(1).  For this purpose, a “trade or                
          business” is generally defined as any activity in connection with           
          a trade or business or any activity for the production of income            
          under section 212.  Sec. 469(c)(6).                                         
               In general, a rental activity is treated as a passive                  
          activity regardless of whether the taxpayer materially                      
          participates.  Sec. 469(c)(2),(4).  If a taxpayer is described in           
          section 469(c)(7), section 469(c)(2) does not apply, and the                
          taxpayer’s rental activity, if conducted as a trade or business             
          or for the production of income, is a passive activity unless               
          the taxpayer materially participates in the activity.  Sec.                 

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