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Discussion
I. Disallowed Deductions
Deductions are a matter of legislative grace, and a taxpayer
bears the burden of proving that he is entitled to the deductions
claimed. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503
U.S. 79 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435
(1934). The taxpayer is required to maintain records that are
sufficient to enable the Commissioner to determine his correct
tax liability. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
In addition, the taxpayer bears the burden of substantiating the
amount and purpose of the claimed deduction. See Hradesky v.
Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976).
Section 7491(a), a new provision created by Internal Revenue
Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L.
105-206, sec. 3001, 112 Stat. 685, 726, places the burden of
proof on respondent with regard to certain factual issues.
Section 7491 applies to examinations commenced after July 22,
1998. See RRA 1998 sec. 3001(c), 112 Stat. 727. The examination
in the instant case commenced after July 22, 1998; accordingly,
we evaluate whether respondent bears the burden of proof pursuant
to section 7491(a).
Section 7491(a)(1) provides that if, in any court
proceeding, the taxpayer introduces credible evidence with
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