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meet their burden of proof in substantiating the questioned
deductions. In so holding, we note that we have not applied the
rule of Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930), under which the Court may approximate the amount of a
deductible expense when evidence shows that a taxpayer incurred
it, because we have no basis upon which to make such an estimate.
See Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
As to the applicability of section 469, section 469 was
enacted by Congress as part of the Tax Reform Act of 1986,
Pub. L. 99-514, sec. 501(a), 100 Stat. 2085, 2233, to require
that passive losses generally be used currently to offset only
passive income. Passive losses include most losses from a rental
activity. Sec. 469(c)(2). In the case of rental real estate
activities, taxpayers like petitioners are allowed to deduct
currently losses up to $25,000. Sec. 469(i).
Harris Enterprises is a rental real estate activity; thus,
section 469 applies to limit to $25,000 petitioners' deduction
for any resulting loss. Although petitioners invite the Court to
carve out an exception for small businesses, we decline to do so.
We find nothing in the text of section 469, or its legislative
history, that supports petitioners' bald assertion that the
section does not apply to small businesses.
We sustain respondent's determination on this issue.
3. $17,014 Understatement of Gross Income
Respondent determined that petitioners had an additional
understatement of income equal to $17,014. Petitioners argue
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