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circumstances, shift to the Commissioner under section 7491(a) if
the taxpayer introduces credible evidence with respect to any
factual issue relevant to ascertaining the taxpayer’s income tax
liability. See Higbee v. Commissioner, 116 T.C. 438, 441 (2001).
However, the burden of proof remains on petitioners in this case
as they have neither alleged that section 7491(a) is applicable
nor introduced sufficiently credible evidence with respect to the
factual issues relevant to ascertaining their income tax
liability. See id.
B. Losses From Rental Activities
Section 469 generally disallows for the taxable year any
passive activity loss. Sec. 469(a). A passive activity loss is
defined as the excess of the aggregate losses from all passive
activities for the taxable year over the aggregate income from
all passive activities for that year. Sec. 469(d)(1). A passive
activity is any trade or business in which the taxpayer does not
materially participate. Sec. 469(c)(1). Rental activity, such
as petitioners’ renting out the Lyon Street property, is
generally treated as a per se passive activity regardless of
whether the taxpayer materially participates. Sec. 469(c)(2) and
(4). Under section 469(c)(7)(B), however, the rental activity of
a taxpayer in a real property trade or business (real estate
professional) is not per se a passive activity. Instead, it is
treated as a trade or business and subject to the material
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Last modified: November 10, 2007