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OPINION
Fair Market Rental Value
Section 162(a)(3) provides that a taxpayer may deduct all
the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on a trade or business, including:
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.
Section 162(a)(3) by its terms does not limit deductions for
rental payments to a "reasonable" amount, but when the lessor and
lessee have a close relationship and no arm's-length dealing
between them, an inquiry into what constitutes reasonable rental
is necessary to determine whether the sum paid exceeds what the
lessee would have been required to pay had he dealt at arm's
length with a stranger. Sparks Nugget v. Commissioner, 458 F.2d
631, 635 (9th Cir. 1972), affg. T.C. Memo. 1970-74; Place v.
Commissioner, 17 T.C. 199, 203 (1951), affd. per curiam 199 F.2d
373 (6th Cir. 1952). The taxpayer must establish that the sums
paid were in fact rentals that he would have been required to pay
in an arm's-length deal; to do so, he must show the amounts paid
were reasonable. Place v. Commissioner, supra at 204.
The fair market value of a property must reflect the highest
and best use of the property on the relevant valuation date.
Estate of Juden v. Commissioner, 865 F.2d 960, 963 (8th Cir.
1989), affg. T.C. Memo. 1987-302; Stanley Works & Subsidiaries v.
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