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Respondent argues that the absence of a rental agreement
between petitioners and the corporation is a factor that supports
a finding that the property at issue did not produce rental
income.5 Petitioners counter that rent payments were not made by
the corporation for use of the Branch property initially because
of a lack of cash-flow. Instead of making rental payments to
petitioners, the corporation paid the utilities and other
expenses incurred in operating the building. Separate corporate
income tax returns were filed by Volm’s in which its income and
expenses were reported. By the third year after the purchase
(the year following the one in issue), the corporation was able
to, and did, pay a $3,000 monthly rental to petitioners.
Initially, rent was paid for use of the building in the form of
the payment of expenses. Although petitioners did not report
Volm’s payments of utilities and other expenses as rent, they
also did not claim the corresponding deductions for interest and
depreciation attributable to Volm’s usage of the Branch property.
Generally, for purposes of deductibility, a taxpayer may
deduct reasonable rents paid for property used in a trade or
5 Respondent also referenced subsecs. 1.469-1T(e)(3)(ii),
(vi), and (vii), Temporary Income Tax Regs., 53 Fed. Reg. 5702,
5703 (Feb. 26, 1988), for his argument that Volm’s and
petitioners were in some type of joint venture, under which
Volm’s was allowed to operate the liquor business in the Branch
property. Because we find that there was a rental agreement
between petitioners and the liquor business, it is not necessary
to further address this aspect.
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