For an activity classified as a hobby, the expenses are categorized as follows:

(1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g., depreciation, amortization, and depletion).

(2) Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes and home mortgage interest.

(3) Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjusted basis (e.g., maintenance, utilities, and supplies).

If these expenses exceed the gross income from the activity and are thus limited, the sequence in which they are deductible is:
a. (1), (2), (3).
b. (1), (3), (2).
c. (2), (3), (1).
d. (2), (1), (3).
e. (3), (2), (1).

c