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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
difference.
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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