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Based on these amounts, respondent determined that reasonable
amounts for Wysong Medical to pay for the use and occupancy of
the leased property were $6,500 and $3,250 in 1992 and 1993,
respectively.
OPINION
We must decide whether amounts paid as rent by Wysong
Medical to Wysong Corp. represented ordinary and necessary
expenditures under section 162(a)(3). Deductions are a matter of
legislative grace, and petitioners bear the burden of showing
that they are entitled to the deductions claimed. Rule 142(a);
New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934).
Section 162(a)(3) allows a deduction for all ordinary and
necessary business expenses, including rent required to be paid
as a condition for the use of property.3 Inherent in the phrase
"ordinary and necessary" is an element of reasonableness, and,
where the lessor and lessee are closely related and there is no
arm's-length dealing between them, an inquiry into what
constitutes reasonable rent is necessary to determine whether the
sums paid exceed what the lessee would have paid in an arm's-
3 Sec. 162(a)(3) provides that "There shall be allowed as a
deduction all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business, including * * * rentals or other payments required to
be made as a condition to the continued use or possession, for
purposes of the trade or business, of property to which the
taxpayer has not taken or is not taking title or in which he has
no equity."
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