Southern Boiler Sales & Service, Inc. - Page 13

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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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