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In the case of the Dunn property, Blockbuster deducted
$11,020.43 from its rent due under the lease agreement. REE
reported $628.43 of the $11,020.43 as rental income on its 1992
return. In the statutory notice of deficiency, respondent
increased REE's rental income by $10,392, the amount incurred by
Blockbuster for carpeting costs that REE did not report as rental
income.
In the case of the Roosevelt property, Blockbuster deducted
$10,023.31 from its rent due under the lease agreement. TNE
reported such amount as rental income on its 1991 return. TNE
also claimed a deduction in the amount of $10,023.31 as a repairs
expense. Respondent disallowed the claimed deduction and
determined that the costs were capital expenditures that were
properly added to TNE's basis in the Roosevelt property.
Section 61 defines gross income to mean all income from
whatever source derived, including rents. Sec. 61(a)(5). If a
lessee places improvements on real estate which constitute in
whole or part a substitute for rent, such improvements constitute
rental income to the lessor. Sec. 1.61-8(c), Income Tax Regs.
Whether or not improvements made by a lessee result in rental
income to the lessor in a particular case depends upon the
intention of the parties, which may be indicated either by the
terms of the lease or by the surrounding circumstances. Id.
The statements accompanying the rent checks to REE and TNE
include credits for the amounts incurred by Blockbuster for the
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