76 T.C. 7">*7 The Commissioner determined a deficiency of $ 7,577 in the petitioners' Federal income tax for 1973. Due to concessions by the parties, the only issue for decision is whether 76 T.C. 7">*8 the amounts paid as rent by Dr. May in 1973 to an irrevocable trust created by the petitioners for the benefit of their children constituted an ordinary and necessary business expense under section 162(a) of the Internal Revenue Code of 1954. ¹

FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found.

The petitioners, Lewis H. V. and Nancy C. May, husband and wife, maintained their legal residence in Arcadia, Calif., when they filed their petition in this case. They filed a joint Federal income tax return for 1973 with the Internal Revenue Service, Fresno, Calif.

During the taxable year 1973, Lewis H. V. May was a doctor of medicine1981 U.S. Tax Ct. LEXIS 193">*197 engaged in the general practice of medicine at 5807 Temple City Boulevard, Temple City, Calif. The doctor had been conducting his practice in a building situated on such property for some years prior thereto. The petitioners owned, as tenants by the entirety, the land and medical building at 5807 Temple City Boulevard (the medical property), which was encumbered by a mortgage.

In 1970, Dr. May contacted an attorney for the purpose of arranging a transfer of the medical property in trust. The attorney drafted a declaration of trust setting forth that the "Trustors," the petitioners, "have delivered" to Lewis H. V. May and Harlos Gross, as "Trustees," all their right, title, and interest in and to the medical property. In the declaration, the trustees acknowledged delivery of the property to them and agreed to hold the property in trust for the benefit of the petitioners' four children. On January 15, 1971, Dr. May and Mr. Gross executed the declaration as trustees, and petitioners, as trustors, executed the following statement, which was attached to the declaration: "We certify that we have read the foregoing Declaration of Trust (Irrevocable), and that it correctly states the1981 U.S. Tax Ct. LEXIS 193">*198 terms and conditions under which the Trust Estate is to be held, managed and disposed of by the Trustees. We approve the 76 T.C. 7">*9 Declaration of Trust in all particulars, and have requested the Trustees to execute it." The declaration described the medical property as having a value of $ 46,504 and encumbered by trust deed notes aggregating $ 21,619.

The petitioners first became acquainted with Mr. Gross in 1957. Mr. Gross owned the grocery store at which the petitioners shopped, and he became acquainted with the May family. He also participated in various civic organizations with Dr. May. Mr. Gross and his family had, at various times, been patients of Dr. May. Mr. Gross was not related to the petitioners by blood or marriage. Mr. Gross had been a trustee of other trusts and was familiar with the duties of a trustee. He served as trustee of the May trust without compensation.

The declaration of trust creates four separate irrevocable trusts, one for the benefit of each of the petitioners' children. The income is payable currently, except that during the minority of a beneficiary, his share of the income is accumulated until he reaches age 21. The trustees are given the power1981 U.S. Tax Ct. LEXIS 193">*199 to apply either income or corpus for the education, maintenance, medical care, or support of a beneficiary but not in discharge of any parental obligation of petitioners. The trustees are required to distribute any accumulated income and corpus to a beneficiary when he attains age 25.

The trust cannot be amended, altered, or revoked by any person prior to termination. In the declaration of trust, the trustors "relinquish, absolutely and forever, all their possession of, or enjoyment of, or right to or income from, the Trust property" and "expressly renounce for themselves, and for their estates, any and all interest, either vested or contingent, including any reversionary interests or possibility of reverter, in the income or corpus of these Trusts." The declaration of trust further provides that no part of the corpus or income of the trust should ever be used for the benefit of the trustors nor should it be used to pay premiums on insurance policies on their lives or to satisfy their legal obligations. Trustors relinquish all further right to designate, alter, amend, or in any way change the designation of beneficiaries.

Under the declaration of trust, the trustees are given broad1981 U.S. Tax Ct. LEXIS 193">*200 76 T.C. 7">*16 powers to manage the trust property, including the powers to lease the property, to make improvements, to borrow money, and to invest trust assets in both low-risk and speculative ventures. The declaration specifically vests the trustees with "all the rights, powers and privileges which an absolute owner of the same property would have." However, the powers of the trustees are subject "always to the discharge of their fiduciary obligations" and to the exercise of reasonable prudence in making investments. Also, neither the trustors nor the trustees are allowed to deal with or dispose of the corpus or income of the trust for less than an adequate consideration, nor can they borrow all or part of the trust corpus or income without adequate interest or security.

The declaration of trust makes no provisions for resolving disputes which may arise between the two trustees. It designates the individuals to succeed Dr. May and Mr. Gross as trustees, with the limitation that Dr. and Mrs. May shall not serve as trustees at the same time. The original trustees are to receive no compensation, but compensation is to be paid to successor trustees.

The names and birth dates of the petitioners' 1981 U.S. Tax Ct. LEXIS 193">*201 children are as follows:

The trustors executed a deed transferring title to the medical property to the trustees. The deed was acknowledged on September 20, 1973, and was recorded in the official records of Los Angeles, Calif., on October 2, 1973. The deed was actually prepared at the time of the execution of the declaration of trust. Although the deed now bears an execution date of September 20, 1973, the original execution date on the deed had been erased.

After January 15, 1971, the petitioners and the cotrustees proceeded as if all the necessary steps had been taken to establish the trust for the medical property. Dr. May was the sole occupant of such property prior to the execution of the 76 T.C. 7">*11 declaration of trust, and thereafter, he continued to be the sole occupant of such property. Gift tax returns were timely filed by the petitioners reflecting the gift of their interests in the property. A fiduciary income tax return was filed by the trust for each of the taxable years 1971, 1972, and 1973, in which deductions were claimed1981 U.S. Tax Ct. LEXIS 193">*202 for distributions of income to the beneficiaries. From 1971 through 1973, the trust paid the installments on the mortgage on the medical property.

When the declaration of trust was executed, it was understood that the trustees would enter into a lease with Dr. May for the rental of the medical property whereby he would pay all taxes, insurance, utilities, and other operating expenses, and a rental of $ 1,000 per month. The petitioners' attorney prepared a rough draft of the lease. In April 1972, the attorney left private practice and turned the matter over to another law firm. The lease was never executed. During the taxable years 1971 through 1973, Dr. May paid $ 1,000 per month to the trust as rent; he also paid taxes and other expenses of the property. Mr. Gross assumed that there was an executed lease and that title to the property had been transferred to the trust, but he made no independent investigation to determine whether a lease had been executed and the transfer completed. However, Mr. Gross testified that he "checked the checkbook about four times a year" and "looked to see if the rent had been paid." A rental of $ 1,000 per month net to the trust was a reasonable1981 U.S. Tax Ct. LEXIS 193">*203 rental for the medical property.

On their Federal income tax return for 1973, the petitioners deducted the payments made by Dr. May as rent. In his statutory notice of deficiency, the Commissioner disallowed the entire deduction. In explanation thereof, the Commissioner stated that:

The deduction claimed of $ 12,000.00 for rent on business property paid to a family trust is not allowed because it has not been established that these expenses were incurred or, if incurred, were expended for ordinary and 76 T.C. 7">*12 necessary business expense. Therefore, your taxable income is increased by such amount.

OPINION

The only issue in this case is whether the payments made by Dr. May as rent in 1973 were ordinary and necessary business expenses under section 162(a). In part, that section provides:

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 --

* * * *

(3) 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 which1981 U.S. Tax Ct. LEXIS 193">*204 he has no equity.

The Commissioner concedes that the payments were made by Dr. May, that such payments constituted reasonable rental for the medical property, and that such property was used in Dr. May's medical practice. Nevertheless, the Commissioner contends that the payments are not deductible because the transfer in trust should not be recognized for tax purposes. In the first place, he argues that under California law, a valid trust was not created because there was no effective transfer of the medical property in trust. In the alternative, he argues that even if such transfer took place, the trust should not be recognized for tax purposes because Dr. May never relinquished control of the medical property.

The Commissioner's alternative argument will be considered first, and for purposes of such consideration, we shall assume that the medical property was transferred in trust before 1973. Yet, such fact by itself does not entitle the petitioners to the deduction for rent. When a taxpayer transfers property to a trust and names the members of his family the beneficiaries and himself the trustee, the transaction must be closely scrutinized to determine whether substance1981 U.S. Tax Ct. LEXIS 193">*205 comports with form. ²Helvering 76 T.C. 7">*13 , 309 U.S. 331">309 U.S. 331, 309 U.S. 331">335 (1940); Penn v. Commissioner, 51 T.C. 144">51 T.C. 144, 51 T.C. 144">149-150 (1968); Van Zandt v. Commissioner, 40 T.C. 824">40 T.C. 824 (1963), affd. 341 F.2d 440">341 F.2d 440 (5th Cir. 1965), cert. denied 382 U.S. 814">382 U.S. 814 (1965). In Mathews v. Commissioner, 61 T.C. 12">61 T.C. 12 (1973), revd. 520 F.2d 323">520 F.2d 323 (5th Cir. 1975), cert. denied 424 U.S. 967">424 U.S. 967 (1976), this Court drew upon the numerous decisions dealing with whether the grantor of such a trust may deduct payments made by him to the trust as rent, and we set forth the following criteria for deciding whether the deduction is to be allowed:

(1) The grantor must not retain substantially the same control over the property that he had before he made the gift.

(2) The leaseback should normally be in writing and must require payment of reasonable rent.

(3) The leaseback (as distinguished from the gift) must have a bona fide business purpose. ³

1981 U.S. Tax Ct. LEXIS 193">*206 (4) The grantor must not possess a disqualifying "equity" in the property within the meaning of section 162(a) (3).

Since Mathews, we have continued to rely upon these criteria in deciding cases involving gift-leaseback transactions. E.g., Lerner v. Commissioner, 71 T.C. 290">71 T.C. 290 (1978); Quinlivan v. Commissioner, T.C. Memo. 1978-70, affd. 599 F.2d 269">599 F.2d 269 (8th Cir. 1979), cert. denied 444 U.S. 996">444 U.S. 996 (1979); Serbousek v. Commissioner, T.C. Memo. 1977-105.

1981 U.S. Tax Ct. LEXIS 193">*207 Here, during 1973, the petitioners did not have an equity in the medical property in the sense of a property right "which traditionally would have been enforceable by means of an equitable remedy." Oakes v. Commissioner, 44 T.C. 524">44 T.C. 524, 44 T.C. 524">531 (1965). Under the declaration of trust, the sole equitable owners of the property were the petitioners' children. Moreover, Dr. May required the property for his medical practice, and therefore, 76 T.C. 7">*14 the leaseback had a bona fide business purpose. 71 T.C. 290">Lerner v. Commissioner, supra at 302.

Our statement in Mathews that the leaseback should "normally" be in writing reflects our view that the requirement of a written lease is not absolute. See Brooke v. United States, 468 F.2d 1155">468 F.2d 1155 (9th Cir. 1972), affg. 300 F. Supp. 465">300 F. Supp. 465 (D. Mont. 1969). While there was no written lease of the trust property, we are satisfied on the present record that the terms of the lease were clearly understood by the trustees and faithfully observed by the parties. Accordingly, we feel that the requirement of a written lease need not be imposed here.

The1981 U.S. Tax Ct. LEXIS 193">*208 requirement that the rent be reasonable finds its roots in the statutory mandate that the rent be "required." Sec. 162 (a) (3). In seeking to determine whether reasonable rent was paid as evidencing payment of a required rent, courts have sometimes examined the lessor/trustee to determine whether he is independent of the lessee/grantor. Where, as here, the reasonableness of the rent paid is conceded, inquiry into the independence of the lessor is unnecessary to make the requisite determination to satisfy this prong of the Mathews test.

The remaining prong of the Mathews test -- that the grantor must not retain substantially the same control over the property that he had before he made the gift -- has also caused courts to consider the independence of the trustee in a gift-leaseback situation. As the Ninth Circuit stated: "Many decisions pivot on the issue of the independence of the trustee." Brooke v. United States, 468 F.2d 1155">468 F.2d at 1157.

In the present case, it is noteworthy that the gift of the property by petitioners to the trust was of their entire interest in the property and irrevocable. This distinguishes the instant case from those1981 U.S. Tax Ct. LEXIS 193">*209 involving a transfer in trust with a reversion to the grantor. See, e.g., 309 U.S. 331">Helvering v. Clifford, supra; 40 T.C. 824">Van Zandt v. Commissioner, supra; 51 T.C. 144">Penn v. Commissioner, supra.

Nor does the instant case involve a sole trustee who is also the grantor. The trustees herein are Dr. May and Mr. Gross. At the trial, Mr. Gross testified that as trustee he felt independent of Dr. May. Mr. Gross had previously served as a trustee for other trusts, and testified that he was aware of the fiduciary nature of the position and of the statutory liability imposed on trustees by the State of California. Cal. Civ. Code Ann. secs. 2228-2239 (West 1954). See Goodman v. Commissioner, 74 T.C. 684">74 T.C. 684 (1980), 76 T.C. 7">*15 and cf. 468 F.2d 1155">Brooke v. United States, supra.Mr. Gross monitored the rental payments to the trust through examination of the checkbook each quarter.

While Mr. Gross might have expended more time and exercised more detailed supervision of the day-to-day operations of the trust, we are persuaded that, under the present facts, his actions as trustee were sufficient to establish 1981 U.S. Tax Ct. LEXIS 193">*210 his independence. The management of the trust corpus, due to its size and lack of complexity, required no more. Accordingly, we need not decide whether an independent trustee is required in every gift-leaseback case, for we are satisfied that Mr. Gross is sufficiently independent to meet the tests of Mathews: the rent paid under the lease was reasonable, the leaseback had a bona fide business purpose, the grantors did not possess a disqualifying equity in the property; and the grantors' control over the property was not substantially the same control possessed before the gift.

Concerning respondent's first argument -- that under California law, a valid trust was not created because there was no effective transfer of the medical property in trust -- we find that the trust instrument effectuated a valid transfer. Keogh v. Noble, 136 Cal. 153">136 Cal. 153, 68 P. 579">68 P. 579 (Cal. 1902); Olsen v. Cornwell, 134 Cal. App. 419">134 Cal. App. 419, 25 P.2d 879">25 P.2d 879 (1933); Cal. Civ. Code Ann. secs. 2221, 2222, 1091 (West 1954). In this regard, we need not consider the deed which petitioners alternatively introduced as evidence of the transfer. 1981 U.S. Tax Ct. LEXIS 193">*211 See Weiner v. Mullaney, 59 Cal. App. 2d 620">59 Cal. App. 2d 620, 140 P.2d 704">140 P.2d 704 (1943). The declaration of trust adequately declared the trust of the property and accomplished the necessary transfer of petitioners' entire right, title, and interest in the property to the trust on January 15, 1971. That being the case, and all other criteria for deductibility having been met, we hold that petitioners are entitled to deduct the rental paid by Dr. May for the use of the medical property.

Due to concessions by the parties,

Decision will be entered under Rule 155.

76 T.C. 7">*16 Goffe, J., concurring: Dr. May is undoubedly entitled to deduct the rentals paid to the trust in 1973. However, I arrive at this conclusion in quite a different manner than does the majority. Those reading the majority's opinion are no doubt confused by its treatment of the "independent trustee" requirement. It first announces that the independence of the trustee is an important consideration; it then makes the critical finding that the trustees in the instant case were independent of Dr. May; and, finally, it announces that "we need not decide whether an independent trustee1981 U.S. Tax Ct. LEXIS 193">*212 is required in every gift-leaseback case." (Majority opinion at p. 15.) To the extent that such treatment implies that the trustees in the present case must be independent of Dr. May as a prerequisite to his deduction of the rental payments, I disagree. Where, as here, the grantors have transferred away their entire right, title, and interest in the trust property, my analysis of the applicable statute and relevant case law leads me to the inescapable conclusion that the independence of the trustees is irrelevant except in cases where the reasonableness of the rental paid is disputed.

The misplaced emphasis on the independence of the trustees which is implicit in the majority opinion and explicit in the opinions of the dissenters is merely the end of a long slide down a slippery slope onto which we inadvertently stepped years ago. This case presents a golden opportunity to set forth a coherent treatment of gift-leaseback transactions. However, in order to explain where we should go, we must understand from whence we have come.

Before I delve into the evolution of the jurisprudence of the tax treatment of gift-leaseback transaction, we should concisely identify the issue with which1981 U.S. Tax Ct. LEXIS 193">*213 we are here concerned -- the deductibility under section 162(a)(3) of the rentals paid by a grantor (here Dr. May) to a trust to which he transferred the property which he is leasing. We have not been asked to determine which taxpayer, i.e., petitioners, the income beneficiaries, or the trust, is taxable on the income of the trust. Therefore, the only statutory standard which we must analyze in order to decide whether the rentals paid are deductible is section 162, specifically section 162(a)(3), which provides:

SEC. 162. TRADE OR BUSINESS EXPENSES.

(a) In General. -- There shall be allowed as a deduction all the ordinary and 76 T.C. 7">*17 necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including --

* * * *

(3) 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.

Simpson, J., dissenting: I subscribe to the views forcefully set forth by Judge Wilbur, but I should like to add the following comments. In its approach, the majority has lost sight of the purpose of the criteria established by Mathews. In a gift-leaseback transaction, there is a serious question as to whether the transfer has sufficient economic reality for it to be recognized 76 T.C. 7">*34 for Federal tax purposes. After reviewing and analyzing the other decisions in this area, the Mathews criteria were developed to provide a rational basis for resolving such cases. Their ultimate objective is to1981 U.S. Tax Ct. LEXIS 193">*250 decide whether the transaction has economic reality, and to do so, it is necessary to decide whether the donor has, in fact, parted with the control of the property. Thus, although a lease need not be in writing for some purposes, it is important that the lease be written in a gift-leaseback situation so that we know the terms of the lease and can judge whether the donor has really parted with control of the property. Similarly, although the imposition of fiduciary obligations on a person may be sufficient to cause him to be recognized as a trustee for some purposes, it is important that the trustee be wholly independent of the donor for purposes of judging the control relinquished by the donor. When the purpose of the Mathews criteria is kept in mind, it is clear that the lack of a written lease in this situation was very material and that Mr. Gross was not the type of independent trustee who would assure that the trust and lessee dealt with each other at arm's length.

In addition, under California law, the trust was not created before September 20, 1973, because it did not become the legal owner of the medical property before that date. In the first place, the deed purporting1981 U.S. Tax Ct. LEXIS 193">*251 to transfer the property bears a date of execution of September 20, 1973. Strong proof is required to contradict the terms of a written instrument ( Lucas v. Commissioner, 58 T.C. 1022">58 T.C. 1022 (1972)), and the record contains no such proof showing an earlier execution date. Second, the California courts would not find, as does the majority, that the trust instrument itself conveyed the property. Under California law, real property can be transferred only by a written instrument executed by the transferor. Cal. Civ. Code Ann. sec. 1091 (West 1954). To transfer property, a writing must reveal an intent to do so. Olson v. Cornwell, 134 Cal. App. 419">134 Cal. App. 419, 25 P.2d 879">25 P.2d 879 (1933); Roberts v. Abbott, 48 Cal. App. 779">48 Cal. App. 779, 192 P. 345">192 P. 345 (1920). Here, when the trust instrument was prepared by the petitioners' attorney, a deed of the medical property was also prepared. The trust instrument stated that the petitioners "have delivered" such property to the trustees. That language indicates that the trustors believed that the property had been conveyed by some other instrument, and the simultaneous1981 U.S. Tax Ct. LEXIS 193">*252 preparation of the deed 76 T.C. 7">*35 reinforces that interpretation of the language of the trust instrument.

Two California cases, In re Goetz's Estate, 13 Cal. App. 198">13 Cal. App. 198, 109 P. 145">109 P. 145 (1910), and 48 Cal. App. 779">Roberts v. Abbott, supra, are analogous to this case. In each of those cases, there was a written contract for the transfer of real property. However, in each case, the contract also indicated that title was to be passed by another instrument. Principally because of the reference to another instrument of transfer, each court held that the contract did not effect a conveyance but was merely an agreement to convey. Similarly, the trust instrument in this case fully set forth the agreement between the settlors, Dr. and Mrs. May, and the trustees, Dr. May and Mr. Gross, with respect to the medical property, but the instrument itself clearly manifested an intent that the property be conveyed by the deed. In my opinion, therefore, it cannot be said that the trust instrument conveyed the medical property.

The majority cites three California cases to support its conclusion. 134 Cal. App. 419">Olson v. Cornwell, supra;1981 U.S. Tax Ct. LEXIS 193">*253 Keogh v. Noble, 136 Cal. 153">136 Cal. 153, 68 P. 579">68 P. 579 (1902); Weiner v. Mullaney, 59 Cal. App. 2d 620">59 Cal. App. 2d 620, 140 P.2d 704">140 P.2d 704 (1943). Olson v. Cornwell is authority for nothing more than the proposition that an instrument conveys property if it manifests an intent to do so. The instrument involved in that case showed such an intent, but was inartfully drafted. The court held that "inaccuracy of expression or * * * ineptness of the words used" did not prevent the instrument from effecting a conveyance. Keogh v. Noble did not involve the question of when an instrument conveys property. There, it was clear that a transfer had been made, and the only issue was whether the transferee owned the property outright or as trustee for the benefit of the transferor. Weiner v. Mullaney also did not involve the issue of transfer. In that case, a brother had written a series of letters to his sister indicating that he was holding property for her benefit. The court found that the letters manifested an intent to create a trust for the sister and that therefore the sister was entitled to income realized upon the1981 U.S. Tax Ct. LEXIS 193">*254 sale of the property held by the brother.

I recognize, as does the Commissioner in his brief, that if Dr. May alone had been appointed as a trustee, the mere written declaration by Dr. and Mrs. May that Dr. May was holding the medical property in trust would have created a valid, funded trust since there would have been no need for a transfer of the 76 T.C. 7">*36 property to a third party. See 59 Cal. App. 2d 620">Weiner v. Mullaney, supra. However, Mr. Gross was also appointed as a trustee, and therefore, it was necessary that there be a conveyance to him. It is sufficiently clear to me that there was no such conveyance before September 20, 1973.

Wilbur, J, dissenting: I respectfully dissent. This opinion will muddy waters clarified over a long period of time. Indeed, the Eighth Circuit recently noted that "the Tax Court has taken the lead in developing a consistent body of law in this area." Quinlivan v. Commissioner, 599 F.2d 269">599 F.2d 269, 599 F.2d 269">273 (8th Cir. 1979), affg. a Memorandum Opinion of this Court, cert. denied 444 U.S. 996">444 U.S. 996 (1979). The court specifically referred to the four criteria we articulated 1981 U.S. Tax Ct. LEXIS 193">*255 in Mathews v. Commissioner, 61 T.C. 12">61 T.C. 12 (1973), revd. 520 F.2d 323">520 F.2d 323 (5th Cir. 1975), cert. denied 424 U.S. 967">424 U.S. 967 (1976). Only two of the requirements are relevant to this case: that the leaseback must normally be in writing and require payment of reasonable rent; and that the grantor must not retain substantially the same control over the property before and after the gift.

Mathews requires that there normally be a written lease. The reason for this is obvious. When pursuant to an arm's-length transaction a business lease is entered into, prudent men and independent trustees normally insist that the terms agreed upon be reduced to writing. The terms of the lease, the amount of the rent, the circumstances under which rent may be increased, the responsibilities of lessors and lessees, the circumstances of a potential breach, the rights of the parties in case of a breach, the responsibilities for maintenance, repair, insurance, taxes, and other factors are sufficiently complex and the legal consequences1981 U.S. Tax Ct. LEXIS 193">*256 important enough to be reduced to writing. Indeed, as noted later, the California Statute of Frauds requires that a lease for a period longer than 1 year be in writing in order to be valid.

In the instant case, we have a business lease, and the parties 76 T.C. 7">*37 apparently intended it to be for 10 years. Both the business exigencies and prudent procedures, as well as the California Statute of Frauds, mandate that the lease be in writing. ¹Mathews requires that the lease normally be in writing. This is a separate and distinct requirement that has not been complied with in the instant case.

The control requirement simply ensures that the property given away is used for the benefit of the donees, in the same way that it would be if the donee and the donor were unrelated parties. The control requirement, the majority tells us, has "caused courts1981 U.S. Tax Ct. LEXIS 193">*257 to consider the independence of the trustee in a gift leaseback situation." Indeed, in Brook v. United States, 468 F.2d 1155">468 F.2d 1155 (9th Cir. 1972), affg. 300 F. Supp. 465">300 F. Supp. 465 (D. Mont. 1969), the Ninth Circuit (to which this case is appealable) noted that, "in analyzing gift and leaseback cases" one of the factors that must be considered is "the independence of the trustee." 468 F.2d 1155">Brook v. United States, supra at 1157. The court went on to state that:

Many decisions pivot on the issue of the independence of the trustee. See, Van Zandt v. Commissioner of Internal Revenue, 341 F.2d 440">341 F.2d 440 (5th Cir. 1965); Brown v. Commissioner of Internal Revenue, 180 F.2d 926">180 F.2d 926 (3d Cir. 1950); Ingle Coal Corp. v. Commissioner of Internal Revenue, 174 F.2d 569">174 F.2d 569 (7th Cir. 1949); Skemp v. Commissioner of Internal Revenue, 168 F.2d 598">168 F.2d 598 (7th Cir. 1948); Penn v. C.I.R., 51 T.C. 144">51 T.C. 144 (1968); Alden B. Oakes, 44 T.C. 524">44 T.C. 524 (1965); Albert T. Felix, 21 T.C. 794">21 T.C. 794 (1954).1981 U.S. Tax Ct. LEXIS 193">*258 * * * [Brooke v. United States, 468 F.2d 1155">468 F.2d at 1157.] ²

Mr. Gross, the cotrustee herein, was Dr. May's patient, friend, and grocer. His performance was not independent by any stretch of the imagination. The only asset of the trust was Dr. May's medical building, and the deed transferring the property was not acknowledged and recorded until sometime late in 1973 -- 3 years after the trust was established. The deed bears an execution date of 20 September 1973, but the majority notes that "the 76 T.C. 7">*38 original execution date on the deed has been erased." Who did the erasing and for what reason is not known. But we do know Mr. Gross remained comfortably unaware of these matters for 3 years.

1981 U.S. Tax Ct. LEXIS 193">*259 Additionally, rental income from the office building was the only anticipated source of trust income during the early years of the trust. Mr. Gross should have been interested in seeing that the property was leased on a business-like basis, for the lease was the critical business transaction of the trust. Yet the majority tells us that, "Mr. Gross assumed that there was an executed lease and that title to the property had been transferred to the trust, but he made no independent investigation to determine whether a lease had been executed and the transfer completed." (Emphasis added.) But aside from any "independent investigation" that an independent trustee would normally make, Mr. Gross knew he had never cosigned a lease of any kind. That alone would belie any notion that Mr. Gross was an independent trustee.

Mr. Gross, as evidenced by his responses to the following questions, actually had little interest in the lease:

Q. Have you ever discussed with Dr. May the fact that you ought to re-examine that rent, or whether the rental rate is correct, or should be increased, decreased, or anything concerning the rent?

Q. Is there any reason that you have not seen fit to discuss1981 U.S. Tax Ct. LEXIS 193">*260 that?

A. I was under the impression that the lease would have been drawn for 10 years, when the trust was drawn. Now, I never saw the lease. I was just under the impression that it would be drawn. That was what we talked about, that the lease would be drawn, and I'm sorry, I have no recollection of anything else.

The majority tells us that Mr. Gross "felt independent" and testified that "he was aware of the fiduciary nature of his position." More than sensation and cognition are required, for as the majority also tells us, "Mr. Gross had served as a trustee for other trusts." He was also an experienced and successful businessman with 20 employees. In this instance, he simply treated the whole affair as the personal, financial, and family business of Dr. May. How the majority can conclude that he was an independent trustee is beyond me.

76 T.C. 7">*39 III. Discussion of Independent Trustee is Confusing

At one point, the majority states:

The remaining prong of the Mathews test -- that the grantor must not retain substantially the same control over the property that he had before he made the gift -- has also caused courts to consider the independence of the trustee in a gift-leaseback1981 U.S. Tax Ct. LEXIS 193">*261 situation. As the Ninth Circuit stated: "Many decisions pivot on the issue of the independence of the trustee." Brooke v. United States, 468 F.2d 1155">468 F.2d at 1157.

Yet at another point, the majority tells us:

we need not decide whether an independent trustee is required in every gift leaseback case, for we are satisfied that Mr. Gross is sufficiently independent to meet the tests of Mathews: the rent paid under the lease was reasonable, the leaseback had a bona fide business purpose, the grantors did not possess a disqualifying equity in the property, and the grantors' control over the property was not substantially the same control possessed before the gift.

In one breath, we are told that the requirement of an independent trustee originates in the prong of the Mathews test precluding the grantor from retaining substantially the same control over the property before and after the gift; in the next breath, we are told that the trustee is "sufficiently independent" to meet the Mathews test because (in this order) rent paid was reasonable, the leaseback had a business purpose, the grantor did not possess a disqualifying equity in the property, 1981 U.S. Tax Ct. LEXIS 193">*262 and finally, the grantor did not possess the same control before and after the gift.

Under the majority's own opinion, the last of these four criteria is the one directly related to the issue of the trustee's independence. To parade out the other independent Mathews criteria (i.e., that the grantor does not possess the disqualifying equity in the property) and to omit the most significant (that the lease be in writing) merely diverts attention from the Mathews criteria in issue) -- the control of Dr. May before and after the gift. The bare assertion that Dr. May's control was substantially altered by the gift cannot withstand analysis. On the record before us, he simply performed a paper shuffle and continued to call the tune.

The lease must normally be in writing "and require payment of a reasonable rental." The majority states that the "requirement 76 T.C. 7">*40 of a reasonable rental finds its roots in the statutory mandate that the rent be 'required.'" See sec. 162(a)(3). The rent must correspond to the reasonable rental value of the property: anything less is siphoning off money from the trust; anything more simply demonstrates that1981 U.S. Tax Ct. LEXIS 193">*263 the transaction is nothing but a convenient mechanism for the assignment of income.

The parties entered into the following stipulation:

During the years 1971, 1972 and 1973, Dr. May paid a $ 1,000.00 monthly rental for the use of the medical building. This amount of rent is deemed to have been reasonable in the year 1973.

This does not state that the rental was reasonable over the entire 10-year period apparently intended, and respondent is bound by no such stipulation. And indeed, it was not. The property was valued at approximately $ 45,000, and the rental was $ 12,000 per year -- on a net basis. The entire capital of the trust would have been recovered, net of any expenses, in from 3 to 4 years on the basis of Dr. May's payment alone. And there is more, since there was also an additional $ 100-per-month rental from another tenant.

The rent was in fact outrageously high, most of it simply being a gift of Dr. May's income, demonstrating clearly what the transaction was: a mechanism where Dr. May would retain control of the property and assign substantial income to his children. It seems very late in the day to sanction this kind of transaction. ³

As noted earlier, other courts have recognized that "the Tax Court has taken the lead in developing a consistent body of law in this area." This case is entirely inconsistent with that body of law and misstates the applicable criteria. It will unsettle a settled area of the law, producing confusion out of order.

We should remember that lawyers have to advise clients in these difficult areas. Reasonably consistent and settled rules provide predictability and permit planning without undue fear 76 T.C. 7">*41 that respondent, the ubiquitous silent partner in all these transactions, will appear on the scene years later to claim a larger share. In this case, the taxpayer wins, but the social and individual costs of future unnecessary litigation surely flowing from this decision are far too great a price to pay for the compelling equities the majority apparently sees.

Chabot, J., dissenting: It may be that, as suggested in Judge Goffe's concurring opinion, there is no need for an "independent" trustee in the instant case. But the opinion of the Court, and a majority of the Judges of the Court, are unwilling to dispense with the requirement of an independent trustee.

1981 U.S. Tax Ct. LEXIS 193">*265 Presumably, the independent trustee is to serve as some additional guarantor that the transaction resulted in a real change in control over the property. In some manner, the independent trustee is thought to be necessary, notwithstanding the existence of the grantor trustee and (at least some of) the formal paperwork. Presumably, the fiduciary obligations imposed on the grantor trustee are not, by themselves, thought to be sufficient to establish the reality of a change of control. If the independent trustee is to serve some additional function in the analysis of the situation, it would appear that this function must inhere in the concept of "independence." On the basis of the record herein, I do not see that the supposedly independent trustee demonstrated any independence. If all that is required is that the trustee be in existence, with formal fiduciary obligations, then I submit that the opinion of the Court establishes a requirement which can so easily be met in form (though not in substance) that no purpose in the real world is served by the creation of the role of independent trustee.

Since the opinion of the Court and the majority of the judges are unwilling to agree that1981 U.S. Tax Ct. LEXIS 193">*266 the independent trustee is essentially a matter of form that may be dispensed with in the interests of efficiency, and since it is evident that the independence of Mr. Gross was only a matter of form, I conclude that petitioners have failed to satisfy the Court-imposed requirement of showing that there was an independent trustee. Consequently, I respectfully dissent.