Jung Sik Lim & Bok S. Lim - Page 8

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          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 may rent property from a related person or entity, but             
          the deduction is limited to an amount that would have been 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); Coe Lab., Inc. v. Commissioner, 34 T.C. 549, 585-586                
          (1960).  Here, however, the amount of rent paid by Volm’s, in the           
          form of the payment of expenses on the Branch property, was less            
          than the $3,000 monthly rent that was paid when Volm’s became               
          liquid.                                                                     
               An oral lease between related parties has sufficed as the              
          basis for rental deductions.  E.g., Wy’East Color, Inc. v.                  
          Commissioner, T.C. Memo. 1996-136.  Here, an established                    
          corporate entity was using petitioners’ real property for                   
          business purposes.                                                          
               Our holding in response to the limited question posed by the           
          parties is that a business rental relationship existed between              
          petitioners and the liquor business (Volm’s).  Accordingly,                 
          petitioners are entitled to deduct business interest in an amount           
          attributable to the portion of the property used for the liquor             
          business.  To the extent that the interest is attributable to               







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