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the lease agreement in the amounts of $55,000,10 $108,000, and
$184,702, respectively. With respect to the leasing activity,
for 1991 and 1992, petitioners claimed only equipment
depreciation deductions of $171,980 and $171,979, respectively.
With respect to their leasing activity, for 1993, petitioners
claimed deductions for interest expense and depreciation of
$44,538 and $183,478, respectively.
Discussion
Determinations of the Commissioner in a notice of deficiency
are presumed correct, and the burden is on the taxpayer to show
that the determinations are erroneous.11 Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). As a general matter,
deductions are a matter of legislative grace, and the taxpayer
bears the burden of proving entitlement to such claimed
deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934).
1. Were Petitioners’ Rental Activities Passive Activities?
Section 469(a)(1) limits the deductibility of losses from
activities which are deemed “passive” activities. A passive
10See supra note 2. On their 1991 return, petitioners
reported no lease income.
11Sec. 7491, which shifts the burden of proof to respondent
in certain circumstances, does not apply because the examination
of the returns at issue commenced prior to the statute’s
effective date.
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