Lewis H v. May and Nancy C. May v. Commissioner of Internal Revenue

I. FACTS

This ease presents a typical “gift-leaseback” situation. In 1971, the taxpayers, Dr. Lewis H.V. and Nancy C. May, deeded their entire title and interest in improved real property, located in Temple City, California, to an irrevocable trust for the benefit of their four children. The trust instrument appointed Dr. May and a friend, Harlos Gross, as co-trustees. Although executed and delivered in 1971, the deed was not recorded until 1973.

Dr. May, who conducted his medical practice at the property, rented it from the trust under an oral lease. Dr. May paid the trust rent of $1,000 per month. About four times a year, trustee Gross checked to see if the rent, which the government concedes was reasonable, had been paid. The Commissioner of Internal Revenue appeals the United States Tax Court’s decision, reported at 76 T.C. 7 (1981), holding that Dr. May’s rental payments in 1973 were ordinary and necessary business expenses under Internal Revenue Code (IRC) § 162(a). We affirm.

II. ANALYSIS

A. Criteria to determine deductibility.

In reviewing the Tax Court’s decision, we first consider the statutory basis for the claimed deductions. IRC § 162 provides, in pertinent…