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Discussion
The taxpayer generally bears the burden of proving that the
Commissioner’s determinations are incorrect. Rule 142(a). Since
petitioners did not meet the substantiation and recordkeeping
requirements of section 7491(a), the burden of proof remains on
petitioners.
Section 162 permits deductions for all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. Section 212 permits deductions
for all the ordinary and necessary expenses paid or incurred
during the taxable year for the production of income. The
amounts deductible pursuant to these provisions are not in
dispute here. However, section 469 generally disallows passive
activity losses for individual taxpayers. Sec. 469(a)(1)(A). A
passive activity loss is the amount by which the aggregate losses
from all passive activities for the taxable year exceed the
aggregate income from all passive activities for that year. Sec.
469(d)(1). A passive activity is any trade or business activity
in which the taxpayer does not materially participate. Sec.
469(c)(1).
Rental activities generally are treated as passive
activities without regard to the extent that the taxpayer
materially participates in the activity. Sec. 469(c)(2). Rental
activities involving real estate are not necessarily passive
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Last modified: May 25, 2011