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the law firm’s business activity. Respondent determined that
petitioner’s 1994 taxable income includes $175,149 (rather than
the reported $106,049) of rental income.
Petitioner leased the office building to the law firm on
March 1, 1987, pursuant to a written, 5-year lease (the 1987
lease) that provided for monthly rent of $17,500. The 1987 lease
contained the following renewal provision:
24. OPTION TO RENEW
Lessor grants to Lessee three (3) consecutive
options to renew this Lease, each for a term of three
(3) years, at a rental to be mutually agreed to by
Lessor and Lessee prior to the commencement of a
renewal term with respect to that renewal term, with
all other terms and conditions of the renewal lease to
be the same as those herein. To exercise this option,
Lessee must:
(1) give Lessor written notice of the
intention to do so at least 60 days before initial
term expires, and
(2) agree with Lessor on rental for renewal
period at least 30 days before initial term
expires.
In Lessor's sole discretion, failure to comply with either
(1) or (2) above shall cause the option to renew to become
null and void.
On December 27, 1991, petitioner and the law firm executed a
document entitled “Lease Renewal” (the 1991 lease), pursuant to
2(...continued)
participates (within the meaning of sec. 1.469-5T)
for the taxable year * * * [Sec. 1.469-2(f)(6),
Income Tax Regs.]
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