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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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