Thank you all for your help on this.

TaxGuyBill,

I read through all the information regarding STR and passive vs. nonpassive activities.

The TP does meet the material participation test - the 2nd test, "Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn't own any interest in the activity".

I was focused on the 500 hours and the 100 hours test. 

Therefore, you are correct in that it will be reported on Sch. E with the "other passive exceptions" box checked and the "material participation" box checked.

Thank you.