James S. & Denise D. Goodfellow, Daniel R. & Claudia Goodfellow, James B. & Nancy B. Goodfellow - Page 5




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          deductions because it had an economic interest in the unusable              
          materials.1  Petitioners rely on the 7-factor test set forth in             
          Parsons v. Smith, 359 U.S. 215 (1959).  Respondent argues that              
          petitioners lacked an economic interest in the unusable                     
          materials.  Respondent asserts that the Parsons test supports his           
          argument.                                                                   
               We agree with respondent that GBI is not (and thus                     
          petitioners are not) entitled to deduct depletion with respect to           
          the unusable materials.  Petitioners, as shareholders of GBI, an            
          S corporation, are permitted to take into account their pro rata            
          shares of GBI’s “items of income * * *, deduction, or credit the            
          separate treatment of which could affect the liability for tax of           
          any shareholder, and * * * nonseparately computed income or                 
          loss.”  Sec. 1366(a)(1).  GBI claimed the depletion deductions as           
          to its excavation activities, and petitioners, in turn, claimed             
          the depletion deductions through the passthrough provision of               
          section 1366(a)(1).  A deduction for depletion is a matter of               
          legislative grace, Parsons v. Smith, supra at 219, and                      
          petitioners bear the burden of proving that they are entitled to            
          such a deduction.2  Rule 142(a)(1); INDOPCO, Inc. v.                        

               1 Petitioners make no assertion that GBI also had an                   
          economic interest in the usable materials.                                  
               2 The parties agree that sec. 7491(a), which places the                
          burden of proof on respondent in certain cases, does not apply              
          here.  Sec. 7491 applies only to court proceedings arising from             
                                                             (continued...)           





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