Peter S. Pau and Susanna H. Pau - Page 16

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          their deduction to interest on $1.1 million indebtedness based on           
          advice from an accountant.  In her notice of deficiency,                    
          respondent completely disallowed petitioners' Schedule A                    
          deduction for home mortgage interest.                                       
               As a result of the October 31, 1995, meeting with                      
          petitioner, Clement allowed the Paus a home mortgage interest               
          deduction, but he limited the allowable deduction to the interest           
          on $1 million indebtedness.  Consequently, he calculated that the           
          allowable deduction is $99,040 rather than the $107,226 claimed             
          by petitioners, a difference of $8,186.  Clement also increased             
          the Schedule A deduction for personal interest by $819, from                
          $4,210 to $5,029.                                                           
               As a general rule, the Commissioner's determinations are               
          presumed correct, and taxpayers bear the burden of proving that             
          those determinations are erroneous.  Accordingly, with respect to           
          deficiencies flowing from the home mortgage interest deduction              
          and the $840,000 omission, petitioners have the burden of proof.            
          Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).  Since the            
          $150,000 omission was asserted by respondent after the notice of            
          deficiency was mailed, it is new matter on which respondent bears           
          the burden.  Rule 142(a).  Respondent also bears the burden of              
          proving, by clear and convincing evidence, that petitioners are             
          liable for the civil fraud penalty.  Sec. 7454(a); Rule 142(b).             
          Issue 1.  Penalty Pursuant to Section 6663                                  

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