Explain the difference between materially participating and actively participating in an activity. When is the active participation test$$ used?

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Part $1$

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Activity

Type of participation

$1.$

The individual participates in the activity for more than $500$ hours during the year.

Actively

$2.$

The individual's participation in the activity for the year constitutes substantially all of the participation in the activity by all individuals, including individuals who do not own any interest in the activity.

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$3.$

Participation for more than $100$ hours during the year, and that participation is not less than any other individual's participation for the year, including individuals who do not own any interest in the activity.

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$4.$

Type of participation that has the least strict test.

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$5.$

The individual materially participated in the activity for any three years preceding the year in question, and the activity is a personal service activity.

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$6.$

Taking into account all the relevant facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during the year.

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$7.$

The taxpayer does not need be involved on a regular or continuous basis. However, he or she still must be involved in management decisions or in the arranging for others to provide services.

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$8.$

The individual has materially participated in the activity in any five years during the immediately preceding ten taxable years. These five years need not be consecutive.

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$9.$

The individual participates in "significant participation activities" for an aggregate of more than $500$ hours during the year.

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