Paul M. and Wanda E. Harmon - Page 6

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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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