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under section 162. Section 162(a) allows a deduction for “all
the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business”. Section
162(a)(3) specifically includes “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” as deductions that qualify as ordinary
and necessary.
The question as to whether an expenditure satisfies the
requirements of section 162 is one of fact. Commissioner v.
Heininger, 320 U.S. 467 (1943). In addition, “intrafamily
transactions resulting in the distribution of income within a
family unit are subject to the closest scrutiny.” Van Zandt v.
Commissioner 40 T.C. 824, 830 (1963) (citing Commissioner v.
Tower, 327 U.S. 280 (1946); Helvering v. Clifford, 309 U.S. 331
(1940)), affd. 341 F.2d 440 (5th Cir. 1965).
Petitioner maintains that the Sherman Oaks Property rent
payments were made as part of an oral agreement between him and
his brother when incorporating the Skin Service Club in 1991. In
return for the contribution of day-to-day management services to
the corporation by petitioner’s brother, petitioner would be
solely obligated to make rent payments on the Sherman Oaks
Property lease. Petitioner further maintains that the agreement
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Last modified: May 25, 2011