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LFI’s income, deductions, and losses may be appropriately
resolved by applying sections 162 and 183, we direct our analysis
accordingly.
A. Sections 162 and 183
Under section 162, a taxpayer may deduct the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on his trade or business. A taxpayer is engaged in a
trade or business if the taxpayer is involved in the activity (1)
with continuity and regularity, and (2) with the primary purpose
of making a profit. Commissioner v. Groetzinger, 480 U.S. 23, 35
(1987); Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir.
1990), affg. 91 T.C. 656 (1988).
Petitioner has the burden of proving that LFI was engaged in
a trade or business and that LFI is entitled to the deductions
claimed.13 Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.
79 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435
(1934); Welch v. Helvering, 290 U.S. 111 (1933). If petitioner
fails to establish LFI’s entitlement to the deductions under
13The Internal Revenue Service Restructuring & Reform Act of
1998, Pub. L. 105-206, sec. 3001, 112 Stat. 726, added sec.
7491(a), which is applicable to court proceedings arising in
connection with examinations commencing after July 22, 1998.
Under sec. 7491, Congress requires the burden of proof to be
placed on the Commissioner, subject to certain limitations, where
a taxpayer introduces credible evidence with respect to factual
issues relevant to ascertaining the taxpayer’s liability for tax.
In the instant case, petitioners have not raised the application
of this provision. Further, the record indicates that the
Commissioner’s examinations commenced before July 22, 1998.
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