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1T(e)(3)(ii), Temporary Income Tax Regs., supra. Respondent
counters that AGI’s leasing activities are per se passive in
nature and that petitioners do not qualify for any exception.
Instead, respondent claims the losses by petitioners should have
been suspended until a future date when petitioners had gains
from passive activities. See sec. 469(b).
We address, first, whether petitioners produced evidence
sufficient to shift the burden of proof to respondent under
section 7491. We address, second, whether one of the exceptions
to the definition of a “rental activity” applies and whether
petitioners materially participated in that activity.
Burden of Proof
Determinations of the Commissioner in a notice of deficiency
are presumed correct, and the taxpayer bears the burden of
proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). Deductions are generally a matter of
legislative grace, and the taxpayer bears the burden of proving
entitlement to claimed deductions. INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934).
4(...continued)
professional under sec. 469(c)(7)(B). If a taxpayer qualifies as
a real estate professional, the rental activities of the real
estate professional are exempt from classification as a passive
activity under sec. 469(c)(2). Instead, the real estate
professional’s rental activities are treated as a passive
activity under sec. 469(c)(1) unless the taxpayer materially
participated in the activity. Sec. 1.469-9(e)(1), Income Tax
Regs. Because we find that petitioners qualified for the
extraordinary personal services exception, petitioners are not
engaged in a rental activity, and we need not address whether
petitioners qualify for the real estate professional exception.
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