5
In the notice of deficiency, respondent determined that the
income and deductions from petitioner's rental activity should
have been reported on Schedule E, Supplemental Income and Loss,
not Schedule C, because the rental activity was passive, and
therefore subject to the limitations on passive activity losses.
The losses were allowed as deductions from adjusted gross income.
They were not allowed, however, in the computation of
petitioner's self-employment income. Respondent's determination
with respect to petitioner's self-employment income had the
effect of increasing petitioners' earned income, thereby reducing
the allowable earned income credit for the taxable years 1991 and
1992.
Petitioners argue that the income and expenses related to
petitioner's real estate activity should be included in the
calculation of petitioner's self-employment income. Respondent
contends that these amounts are attributable to rentals from real
estate; that petitioner was not engaged in a trade or business as
a real estate dealer; and that therefore these amounts are
excluded from petitioner's self-employment income. Respondent's
determinations are presumed correct, and the burden of proof is
on the taxpayer to prove that the determinations are erroneous.
Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).
Section 1401 imposes a tax on the self-employment income of
individuals. Sec. 1401(a). The term "net earnings from self-
employment" is defined by section 1402(a), in relevant part, as
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