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principal office located in Whiteland, Indiana. Petitioner grows
nursery stock for sale at wholesale and provides landscaping
services. During the taxable years at issue petitioner’s sole
shareholder was James R. Maschmeyer (Maschmeyer). He became sole
shareholder in 1986 after petitioner redeemed the stock held by
his parents.
Rent Deductions
Petitioner owns a parcel of 265 acres. The scale of
petitioner’s operations is approximately twice this area,
however, because petitioner leases additional contiguous land
from Maschmeyer and his wife. The Maschmeyers acquired the land
for petitioner’s use as it became available over several years.
This arrangement was designed to avoid increasing the
corporation’s long-term debt, which would have jeopardized its
ability to borrow for working capital at favorable rates. Tract
B, comprising 126.5 acres situated on the southern border of
petitioner’s own land, was acquired by the Maschmeyers in two
parts: 37-1/2 acres in August 1984 at a price of $52,500 ($1,400
per acre) and 89 acres in December 1986 at a price of $180,000
($2,022.50 per acre). Tract A, comprising 123.5 acres situated
on the northern border of petitioner’s own land, was acquired in
January 1989 through an estate sale for $228,449 ($1,850 per
acre). Thus, the total investment by the Maschmeyers amounted to
approximately $461,000. In January 1989 they entered into a
5-year lease with petitioner for both tracts at an annual rental
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