28
Having disposed of the parties' dispute over the burden of
proof with respect to the substantiation of payments, we preface
the following discussion with the observation that petitioners
have the burden of showing that their payments for rent and
management services were ordinary and necessary business expenses
deductible under section 162. Rule 142(a).
Issue 2. Rental Payments
Section 162 provides, in pertinent part:
SEC. 162(a). In General.--There shall be allowed
as a deduction all the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on
any trade or business, including--
* * * * * * *
(3) rentals or other payments required to be
made as a condition to the continued use or
possession, for purposes of the trade or business,
of property to which the taxpayer has not taken or
is not taking title or in which he has no equity.
Excessive rental payments do not constitute ordinary and
necessary business expenses and are therefore not deductible.
Foyt v. United States, 561 F.2d 599, 603 (5th Cir. 1977).
Payments in excess of reasonable rent pursuant to an agreement
between closely related parties that is not the product of
arm's-length negotiation are not "required" within the meaning of
15(...continued)
does reflect the assumption that the challenged amounts were
paid, and Fleming v. Commissioner, T.C. Memo. 1985-165, would
provide adequate support for granting corporate petitioners'
motion (to the extent that it concerns substantiation of payment)
if it had not been mooted.
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