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OPINION
1. Rent Deductions
Section 162 provides for the deduction of all ordinary and
necessary business expenses, including rentals required to be
paid as a condition for the use of property. Sec. 162(a)(3).
Although the statutory standard does not expressly limit the
deduction to a reasonable amount, where the lessor and lessee are
closely related and there is no arm’s-length dealing between
them, an inquiry into what constitutes a reasonable rental is
necessary to determine whether the sums paid exceed what the
lessee would have been required to pay in an arm’s-length
transaction with an unrelated party. Potter Elec. Signal &
Manufacturing. Co. v. Commissioner, 286 F.2d 200, 202-203 (8th
Cir. 1961), affg. T.C. Memo. 1960-030; Feldman v. Commissioner,
84 T.C. 1, 6-8 (1985); Davis v. Commissioner, 26 T.C. 49, 56
(1956); Place v. Commissioner, 17 T.C. 199, 203 (1951), affd. 199
F.2d 373 (6th Cir. 1952). Since Maschmeyer is petitioner’s sole
owner and it is undisputed that he played a major role in
determining the rental, we look beyond the agreement for evidence
of the fair rental value of the subject property.
Each party presented the opinion of a professional real
estate appraiser to establish fair rental value. Both appraisers
were highly qualified by education and experience to render an
expert opinion. Since neither expert was able to identify
comparable lease transactions within the Indianapolis region,
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Last modified: May 25, 2011