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75 percent of the management fee rounded to the nearest thousand
dollars.
B. Whether Petitioner May Deduct Its Rent Payments to Mr.
Cummings In Excess of the Rent He Paid to the American Red
Cross
1. Contentions of the Parties
Mr. Cummings paid rent of $97,975 per year ($293,925 for 3
years) to the American Red Cross for the 4200 S.W. Corbett St.
property. Mr. Cummings sublet that property to petitioner.
Petitioner paid rent to Mr. Cummings of $216,000, $250,000, and
$264,000 for fiscal years 1989, 1990, and 1991, respectively
($730,000 for 3 years). Respondent contends that petitioner may
not deduct more for rent than Mr. Cummings paid to the American
Red Cross. Petitioner contends that it may deduct all the rent
it paid to Mr. Cummings in those years.
2. Background
A taxpayer generally may deduct reasonable rents paid for
property used in a trade or business. Sec. 162(a)(3); Limericks,
Inc. v. Commissioner, 165 F.2d 483, 484 (5th Cir. 1948), affg. 7
T.C. 1129 (1946). A taxpayer who rents property from a related
person may not deduct more than he or she would have paid if the
parties had dealt at arm’s-length. Sparks Nugget, Inc. v.
Commissioner, 458 F.2d 631, 635 (9th Cir. 1972), affg. T.C. Memo.
1970-74; Levenson & Klein, Inc. v. Commissioner, 67 T.C. 694, 715
(1977). A taxpayer may deduct only the fair rental value of
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