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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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