- 29 -
premises it rents from related persons. Coe Lab., Inc. v.
Commissioner, 34 T.C. 549, 585-586 (1960). We closely scrutinize
whether rents exceed fair rental value if the lessor and lessee
are related. B. Forman Co. v. Commissioner, 453 F.2d 1144 (2d
Cir. 1972), affg. in part and revg. in part 54 T.C. 912 (1970);
Sparks Nugget, Inc. v. Commissioner, supra; Limericks, Inc. v.
Commissioner, supra. Fair rental value is a question of fact.
Utter-McKinley Mortuaries v. Commissioner, 225 F.2d 870, 872-873
(9th Cir. 1955), affg. a Memorandum Opinion of this Court;5 Mark
R. Switz, Inc. v. Commissioner, T.C. Memo. 1979-162.6 Petitioner
bears the burden of proof. Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933).
3. Rental From American Red Cross by Mr. Cummings
A price chosen after arm’s-length bargaining close to the
time of the valuation date is the best evidence of value. Estate
5 In Utter-McKinley Mortuaries v. Commissioner, 225 F.2d 870
(9th Cir. 1955), affg. a Memorandum Opinion of this Court, the
controlling stockholder leased the premises from a third party.
The taxpayer corporation then sublet the premises and paid rent
to the controlling stockholder that was three to four times as
much as the controlling stockholder paid to the third party
lessor. We held that the taxpayer corporation may not deduct the
increased amount of rent because there was no business purpose
for paying increased rent. The U.S. Court of Appeals for the
Ninth Circuit affirmed our decision.
6 In Mark R. Switz, Inc. v. Commissioner, T.C. Memo. 1979-
162, Mark Switz (Switz) controlled the taxpayer-corporation. He
leased property from a third party at a reasonable rental rate.
He sublet the property to the taxpayer-corporation for more than
twice that rate. We disallowed the deduction for rent to the
extent it exceeded the rent Switz paid to the third party.
Page: Previous 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 NextLast modified: May 25, 2011