Edward E. and Constance M. Thorpe - Page 18

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          comparisons with similar rental property under any valuation                
          method.  Mr. Larson's report generally summarizes market                    
          conditions as they existed in the late 1980's and early 1990's in           
          the Washington, D.C., and surrounding vicinity.  Mr. Larson's               
          report does not persuade us that the amount of rent paid by ETCO            
          was not in excess of the amount which an unrelated lessee would             
          have paid in an arm's-length transaction, and we are not bound by           
          it.  Parker v. Commissioner, 86 T.C. 547, 561 (1986).  Mr.                  
          Larson's report contained no calculation of fair market rent                
          based on any method of valuation which could be accepted by the             
          Court.  We find that petitioners have not met their burden of               
          proving that respondent's determination of market valuation was             
          incorrect.  Therefore, ETCO is not entitled to a rent deduction             
          for each of the years in issue in excess of that amount                     
          determined in the notice of deficiency.6  Further, Mr. and Mrs.             
          Thorpe received a constructive dividend in the amount of the                

               6In the notice of deficiency for Mr. and Mrs. Thorpe,                  
          respondent disallowed rental real estate losses associated with             
          the office condominium resulting from the recharacterization of             
          the office rental income as constructive dividends.  Generally,             
          sec. 469 provides that the deduction allowed for a limited amount           
          of passive losses arising from rental real estate activities                
          becomes phased out as the taxpayer's adjusted gross income                  
          reaches certain levels.  Sec. 469(i).  To the extent sec. 469               
          disallows a deduction for losses associated with petitioner's               
          resulting rental losses, the parties must make appropriate                  
          adjustments in their Rule 155 calculation in accordance with the            
          outcome of our opinion in this case.                                        

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