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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
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