Alexander Firsow and Camilla Thomas-Firsow, a.k.a. Camilla Thomas - Page 6

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          the extent that the taxpayer did not “actively participate” in              
          the rental real estate activity.  Sec. 469(a)(1), (i)(1).  In the           
          present case, respondent determined that petitioners actively               
          participated in their rental activity and thus are entitled to              
          deduct some, but not all, of their passive activity losses,                 
          subject to the limitations under section 469(i).                            
               Petitioners, however, classify their rental activity                   
          differently.  They contend that, during the taxable years in                
          issue, they were in the “real property trade or business” as that           
          term is defined under section 469(c)(7).  If they were, then the            
          passive activity loss limitations of section 469 would not apply,           
          and petitioners would be entitled to deduct the full amount of              
          their losses for each year.  See sec. 469(c)(7)(A)(i).                      
               Deductions are a matter of legislative grace, and generally            
          the taxpayer bears the burden of proving entitlement to any                 
          deduction claimed.  Rule 142(a); INDOPCO, Inc. v. Commissioner,             
          503 U.S. 79, 84 (1992).  The burden of proof has not shifted to             
          respondent pursuant to section 7491(a).  While examination of the           
          tax returns in issue commenced after July 22, 1998, neither of              
          the parties has addressed the applicability of section 7491(a).             
          Petitioners have not offered any evidence that they satisfied any           
          of the criteria of section 7491(a)(2)(A) and (B).  Accordingly,             
          we conclude that the burden remains on petitioners to prove that            
          they were in the real property trade or business and that their             






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