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Nelson and Dr. Schwalbach negotiated the stated rent, but
Dr. Schwalbach's main intent during the negotiations was to
secure Dr. Nelson’s presence in the building 1 day a week in
order to further petitioner's business. But for Dr. Nelson, the
River Falls area did not have an orthodontist before 1994.
The Schwalbachs own a commercial building (the Hudson
building) in Hudson, Wisconsin, a city that is close to River
Falls. The Hudson building is similar to the River Falls
building in terms of quality and available space, but the Hudson
building is dissimilar to the River Falls building in that the
former is unimproved space whereas the latter is tailored to the
needs of a dental practice. During the subject years, Dr.
Schwalbach let 530 square feet in the Hudson building for $7,500
per year (i.e., $14.74 per square foot), and he let another
468-square-foot space in the Hudson building for $6,900 per year
(i.e., $14.15 per square foot).
In connection with its lease of the River Falls building,
petitioner claimed deductions on its 1993 and 1994 tax returns
for the following amounts of rent and real estate taxes:
1993 1994
Rent $54,000 $54,000
Real estate taxes 9,113 8,128
Total 63,113 62,128
Of these amounts, respondent disallowed the following:
1993 1994
Rent $28,800 $28,800
Real estate taxes 9,112 8,040
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