For the high-income bracket taxpayer seeking to reduce his tax burden, a gift and leaseback can be a valuable device for reallocating income within the family. To utilize this tax-saving tool, the taxpayer transfers business property to a trustee in short-term trust for his dependents or other beneficiaries, taking care that the trust income is not used to discharge any legal obligation of the taxpayer. By a simultaneous agreement, the trustee leases the property back to the taxpayer for use in his business. The taxpayer then may take a business expenses deduction under section 162(a)(3) of the Internal Revenue Code for the rental payments made to the trustee, while the rental income is split among the lower income brackets of the beneficiaries. When the trust terminates, the property may either be conveyed to the beneficiaries or to a third party, or, as occurred in C. James Mathews, revert to the taxpayer. This note considers whether the taxpayer who retains a reversion may be denied a deduction for the rental payments made during the term of the trust. Not surprisingly, the gift and leaseback arrangement has met substantial resistance from the Internal Revenue Service and has been the subject of considerable litigation, the results of which have created confusion about what the taxpayer must do to utilize this type of trust.
Roberta L. Cook,
Deductibility of Rental Payments Where Reversion Is Retained in Gift, Leaseback Arrangement: C. James Mathews, 61 T.C. 12 (1973),
53 Neb. L. Rev. 303
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