29
section 162(a)(3) and may therefore be rendered nondeductible.
Sparks Nugget, Inc. v. Commissioner, 458 F.2d 631, 634 (9th Cir.
1972), affg. T.C. Memo. 1970-74; Hyde v. Commissioner, T.C. Memo.
1974-103. In the absence of arm's-length negotiations,
determination of what is a reasonable rental requires an inquiry
into whether the amount paid exceeds what a lessee dealing at
arm's length with a stranger would have been required to pay.
Peck v. Commissioner, 904 F.2d 525, 528 (9th Cir. 1990), affg. 90
T.C. 162 (1988); Sparks Nugget, Inc. v. Commissioner, supra at
635. The taxpayer has the burden of rebutting the Commissioner's
determination, initially entitled to a presumption of
correctness, that rental payments are unreasonable, even when the
Commissioner has disallowed them in their entirety. Audano v.
United States, 428 F.2d 251, 257 (5th Cir. 1970).
Here, petitioners have not carried that burden, particularly
since respondent has disallowed only a relatively small part of
their rental payments: $33,738 out of a total of $245,237
claimed as deductions by all three petitioners, leaving a total
deduction of $211,499 not in dispute. Mr. Clearman testified
that the rent for both the Lilac Avenue and the El Centro
properties was determined every 1 to 2 years by calling a local
realtor and inquiring into the prevailing rents for similar
properties. However, this was the only evidence offered by
petitioners to support the conclusion that the rents were fair
and reasonable. We are not satisfied that the rents were
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