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parties had dealt at arm’s length. A taxpayer may
deduct only the fair rental value of premises it rents
from related persons. We closely scrutinize whether
rents exceed fair rental value if the lessor and lessee
are related. Fair rental value is a question of fact.
* * * [Citations omitted.]
See also, e.g., Limericks, Inc. v. Commissioner, 165 F.2d 483,
484 (5th Cir. 1948), affg. 7 T.C. 1129 (1946); Associated
Dentists v. Commissioner, T.C. Memo. 1998-287. We must therefore
determine whether (and if so, to what extent) the rents paid by
petitioner to its shareholders, and deducted by petitioner, were
in excess of the fair market rental values of the properties.
I. Burden of Proof
Before enactment of section 7491 by the Internal Revenue
Service Restructuring and Reform Act of 1998 (RRA), Pub. L.
105-206, sec. 3001(a), 112 Stat. 726, it would have been clear
that respondent’s determinations in the notice of deficiency of
the fair market rental values of the properties were entitled to
a presumption of correctness, and petitioner would bear the
burden of proving that respondent’s determinations were
incorrect. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115
(1933); Wy’East Color v. Commissioner, supra.
The Court of Appeals for the Ninth Circuit has held that the
presumption of correctness does not apply where the Commissioner
takes a position in Court that abandons the determination in the
notice of deficiency. Morrissey v. Commissioner, 243 F.3d 1145
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