We prefer to translate capitalized Lei as "you" and lowercase as "she" to prevent confusion. You may find exceptions to this outside of Duolingo, however in such cases the context will indicate which is more appropriate.
Lei means "she". So the grammatically correct answer is "No, not she' There should at least be provision for that answer as a possible correct one.
I agree. The verb "to be" requires the predicate nominative which is "she" in English.
Well, in the case of "No, it's not her (and, as noted above the correct grammar would be "No, not she")"...the Italian would have to have been "No, non è lei"....
I think Duolingo are at fault here: I feel sure that nowhere have I been told of the policy of capitalizing 'lei' if it means 'you', and when I hover the mouse pointer over the word I get both translations, her AND you. It should only give 'her' if lower case, and only 'you' when with capital 'L', in order to be consistent with its own rules. Two grammars/courses I have, one of them v. erudite, do NOT make a distinction; but a small 1961(!) dictionary I have DOES use cap. L for 'you' (however my 2010 updated one does not). Duolingo need to be much clearer on the point.
nanadne is quite right! "no, not she" is perfectly acceptable, and would be the ONLY grammatically correct solution in certain contexts where 'she' is understood to be the subject (e.g. meaning 'she wouldn't...' in reply to "Would she...?") as opposed to 'her' as the object of a verb (e.g. in reply to "Did you see her?"). Duolingo needs to get its act together a bit more on these cases where context would permit of either solution: but we all need to 'play along' with them to a certain extent once we have worked out how they are thinking in a somewhat inflexible maner.
Doesn't the verb "to be" require the nominative case is English, because the pronoun becomes a predicate nominative? Is it different in Italian?