# May v. Commissioner > United States Tax Court · January 8, 1981 · 76 T.C. 7 URL: https://www.frixlaw.com/law-library/cases/4484419 ## Case - **Full name:** Lewis H. v. May and Nancy C. May v. Commissioner of Internal Revenue - **Court:** United States Tax Court - **Decided:** January 8, 1981 - **Citations:** 76 T.C. 7; 1981 U.S. Tax Ct. LEXIS 193 - **Precedential status:** Published - **Opinion:** Dissent by Wilbur - **Judges:** Ekman,Dawson,Goffe,Irwin,Wiles,Simpson,Simpson,Chabot - **Cited by:** 12 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4484419 ## Opinion text 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, 273 (8th Cir. 1979), affg. a Memorandum Opinion of this Court, cert. denied 444 U.S. 996 (1979). The court specifically referred to the four criteria we articulated in Mathews v. Commissioner, 61 T.C. 12 (1973), revd. 520 F.2d 323 (5th Cir. 1975), cert. denied 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. I. The Leaseback Should Normally Be in Writing and Must Require Payment of a Reasonable Rental 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 consequences 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 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. 1 Mathews 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. II. The Grantor Must Not Retain "Substantially the Same Control Over the Property That He Had Before” He Made the Gift 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 courts to consider the independence of the trustee in a gift leaseback situation.” Indeed, in Brook v. United States, 468 F.2d 1155 (9th Cir. 1972), affg. 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.” 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 (5th Cir. 1965); Brown v. Commissioner of Internal Revenue, 180 F.2d 926 (3d Cir. 1950); Ingle Coal Corp. v. Commissioner of Internal Revenue, 174 F.2d 569 (7th Cir. 1949); Skemp v. Commissioner of Internal Revenue, 168 F.2d 598 (7th Cir. 1948); Penn v. C.I.R., 51 T.C. 144 (1968); Alden B. Oakes, 44 T.C. 524 (1965); Albert T. Felix, 21 T.C. 794 (1954). * * * [Brooke v. United States, 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 197& — 3 years after the trust was established. The deed bears an execution date of 20 September 1973, but the majority notes that “the 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. 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 reexamine that rent, or whether the rental rate is correct, or should be increased, decreased, or anything concerning the rent? A. No. Q. Is there any reason that you have not seen fit to discuss 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. 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-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 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, 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. IV. Reasonableness of Rent The lease must normally be in writing “and require payment of a reasonable rental.” The majority states that the “requirement 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 that 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 V. Conclusion 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 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. Simpson and Parker, JJ., agree with this dissent. See Cal. Civ. Code sec. 1624 (West 1973). 2 he court noted that the necessary independence was achieved in the guardianship under Montana law, saying it was administered with the same independence as any court-administered trust. Although the facts are entirely different from those before us, the court recognized the need for an independent trustee. The oral lease was apparently for 10 years. In spite of respondent’s stipulation as to 1973, the negotiation of a lease without regard to the fair rental value of the property over the 10-year period of the lease (except for 1973) demonstrates this was a solo operation established and run out of Dr. May’s hip pocket. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4484419. Public record. Not legal advice.