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any building or buildings upon such property which in his discretion and judgment may be deemed advisable and proper and for the best interests of the trust and the beneficiaries hereunder * * *
6. Notwithstanding anything herein contained to the contrary, no powers enumerated herein or accorded to the Trustee generally pursuant to law shall be construed to enable the Grantor, herein or the Trustee, or any other person to purchase, exchange or otherwise deal with or dispose of all or any part of the Corpus or income of the trust for less than an adequate consideration in money or money's worth, or to enable the Grantor to borrow all or any part of the Corpus or income of the trust, directly or indirectly, without adequate interest and or securities. No person other than the Trustee, shall have or exercise the power * * * of the trust, either by directing investments or reinvestments or by vetoing proposed investments or reinvestments, or to reacquire or exchange any property of the trust or trusts by substituting other property of any equivalent value. * * *
9. The trusts created herein shall be irrevocable and the Grantor hereby expressly weighs (sic) all rights and powers, whether alone or in conjunction with others, and regardless of where or from what source he may heretofore or hereafter acquire such rights or powers to alter, amend, revoke, or terminate the trust, or any of the terms of this agreement in whole or part. The Grantor hereby declares that his purpose in establishing the trust is to provide his children with a regular income, and by this instrument the Grantor relinquishes absolutely and forever all his possessions or enjoyment of, or right to the income from, the trust property, and all his rights and power whether alone or in conjunction with others to designate the person who shall possess or enjoy the trust property or the income therefrom.(2)
The property which Dr. Lerner conveyed to the trustee as the trust corpus consisted of the furniture, furnishings, medical equipment, office supplies, and items of decoration previously used by Dr. Lerner in his office for the practice of ophthalmology.
Also, on October 1, 1970, Dr. Lerner, as president of the corporation, and Samuel Atlas, as trustee for the trust, executed a lease whereby the property constituting the trust corpus was leased to the corporation for a term of 10 years and 1 month. Pursuant to the lease, the corporation agreed to pay the trustee $650 per month as rent. The lease also provided:
From time to time, at the request of the Lessee in writing, the Lessor may at his option add to the equipment herein leased, and upon delivery to the Lessee of any and all additional equipment, the monthly rental herein shall be increased commencing with the first of the month next following the date of delivery by an amount to be agreed upon by the parties herein, which agreement shall be reduced in writing as a memorandum to be appended hereto and made a part hereof.
2Although we have not set forth all the trust provisions, both parties agree that the trust is a "Clifford" trust. Respondent does not contend that the trust provisions fail to satisfy secs. 671-678.
As the monthly rental payments were received from the corporation, the trustee placed them in a savings account maintained in his name as trustee for the Lerner children. The rental payments and interest on the savings account were the trust's sole source of income.
From time to time during the taxable years at issue, Dr. Lerner requested the trustee to purchase various items of medical equipment and lease them to the corporation. Some of the items were too expensive and the trustee refused to make the purchases. However, on other occasions the trustee did make acquisitions and leased them to the corporation. The funds used to make the purchases were the amounts deposited in the savings account.
The purchases made by the trustee include wall-to-wall carpeting and furniture for the corporation's offices in early 1971. The total expense was $2,463.81 and was paid by the trustee in installments of $546.96 on March 30, 1971, $1,500 on May 20, 1971, and $930.95 on June 9, 1971.
On February 1, 1971, the original lease was modified by the parties to increase the monthly rental to $750 per month in anticipation of the above purchases.
During the period August 21, 1972, through August 8, 1973, the trust bought additional ophthalmological equipment which was included in the lease to the corporation. This equipment cost a total of $2,649.03.3 Adjustments were made in the rent paid by the corporation to cover this equipment.
All of the equipment leased by the corporation was necessary for the corporation's operations. The reasonableness of the rentals for the taxable years at issue is conceded by respondent.
Dr. Lerner also requested on several occasions that the trustee loan him money from the trust funds at more favorable rates than he could obtain elsewhere. The trustee refused to do this.
There is some question whether the trust paid the equipment supplier $2,649.03 or $2,665.96, the amount shown on the supplier's bill introduced in evidence. Since the cost of three pieces of equipment itemized on the bill totaled exactly $2,649.03, which is the amount the trustee testified he paid, and the trustee also testified that the corporation and not the trust paid for supplies and minor repairs, we have adopted the $2,649.03 figure.
The trustee also refused to borrow money to purchase equipment that was too expensive to be acquired from the trust funds. And the trustee refused to acquire certain stock in which Lerner was interested because he, the trustee, did not believe it would be a good investment.
The trustee did maintain insurance policies on the items leased by the corporation. And he paid one repair bill in 1973.
Pursuant to the lease and subsequent agreement, the corporation paid $8,600 to the trust during the corporation's fiscal year ending September 30, 1971, and $9,000 during its fiscal year ending September 30, 1972. The corporation claimed a deduction on its fiscal year 1971 and 1972 tax returns for these amounts. These deductions were disallowed to the corporation on the ground that the expenditures were not ordinary and necessary business expenses of the corporation.
The corporation also paid $650 to the trust as rent during the calendar year 1970. This amount, plus $9,000 paid by the corporation to the trust as rent during the calendar year 1972, were determined in the notice of deficiency in docket No. 4268 76 to be taxable income to Dr. Lerner and Elinor Lerner on the ground that the transfer to the trusts of the equipment leased by the corporation is not recognized for purposes of the Federal income tax.
The basic facts in this case are relatively simple and undisputed. In 1970, Dr. Lerner, who until that time had been a self-employed ophthalmologist, incorporated his practice into a professional service corporation, Hobart A. Lerner, M.D., P.C., which was formed for the purpose of engaging in the practice of ophthalmology. Dr. Lerner acquired all of the issued stock of the corporation for $500 cash; he did not transfer the furnishings and equipment he used in his practice to the corporation. Instead, Dr. Lerner established a trust, with his attorney as trustee, to which he transferred his medical furnishings and equipment. The net income of the trust was to be distributed to his children at least annually. The trust was to terminate in 10 years and approximately 1 month, at which time the corpus and any accumulated income of the trust was to revert to Dr. Lerner. The trustee, in turn, leased the medical furnishings and equipment to the corporation at a fair and reasonable rental for a period coextensive with the life of the trust. The corporation paid the rent to the trustee, who either distributed it to the
*No deficiency was determined for the year 1971 in the notice of deficiency issued to the Lerners.
equipment which was included in the lease for additional and reasonable rental. Dr. Lerner became an employee of the corporation and the corporation charged and received the usual fees for his services and those of certain other employees.
Respondent, in a rather scattergun approach, disallowed the rental as a deduction to the corporation and taxed such rental, which had been paid to the trust, as income to Dr. Lerner, presumably as dividends from the corporation. It is not entirely clear whether respondent determined that the rent was taxable to Dr. Lerner as a dividend received directly from the corporation or as the owner for tax purposes of the trust and taxable on the income thereof. One thing is clear-respondent recognized the corporation as a separate taxable entity, taxing to it the income from the practice of ophthalmology, but disallowing the rental deductions, thus resulting in the deficiency determined to be due from the corporation.
We turn first to the deductibility of the rent, and we find no valid reason to deny it to the corporation.5 The equipment and furnishings covered by the lease were used by the corporation in its business and were required for the production of the income on which it is being taxed. Respondent does not question the reasonableness of the rent and indeed the evidence would not support him if he did. Therefore, the rental was an ordinary and necessary expense of the corporation's business.
Respondent makes a half-hearted attempt to support his disallowance of the rental deduction by arguing that the corporation should be ignored and the transaction should be considered the same as a sale and leaseback between a grantor and his family trust, citing several cases in which the property was leased to partnerships in which the grantor or related individuals were partners. See Hall v. United States, 208 F. Supp. 584 (N.D.N.Y. 1962); Miles v. Commissioner, 41 T.C. 165 (1963). Such cases are inapposite because, if for no other reason, partnerships are not taxable entities whereas the corporation here involved is recognized and taxed as such.
5Sec. 162a/3) provides:
(a) *** 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 which he has no equity.
Respondent also relies on two Fifth Circuit cases, Van Zandt v. Commissioner, 341 F.2d 440 (5th Cir. 1965), affg. 40 T.C. 824 (1963), cert. denied 382 U.S. 814 (1965), and Mathews V. Commissioner, 520 F.2d 323 (5th Cir. 1975), revg. 61 T.C. 12 (1973), cert. denied 424 U.S. 967 (1976), which denied rental deductions in typical sale-leaseback transactions directly between the grantor and the trustee. Respondent argues further that under the rule of Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971), cert. denied 404 U.S. 940 (1971), we must follow those two decisions of the Fifth Circuit because the Court of Appeals for the Second Circuit, to which an appeal of this case would lie, would follow the reasoning of the Fifth Circuit. Respondent discusses several Second Circuit cases to support his argument. We will discuss the merits of the Fifth Circuit's approach in the Van Zandt and Mathews cases later, but we say without any hesitation that our Golsen rule does not require us to follow those cases. The Golsen rule is a rule of judicial administration whereunder, to avoid unnecessary litigation, the Tax Court will “follow a Court of Appeals decision which is squarely in point where appeal from one decision lies to that Court of Appeals and to that Court alone.” The Golsen rule would not be stretched so far as to require us to follow the Fifth Circuit in this case even if there were reason to believe that the Second Circuit would follow the Fifth Circuit. Only if the Second Circuit had itself decided a case “squarely in point” with this case would we feel constrained by the Golsen rule to follow that case. We do not find the Second Circuit cases cited by respondent to be either “squarely in point” or apposite. White v. Fitzpatrick, 193 F.2d 398 (2d Cir. 1951), cert. denied 343 U.S. 928 (1952), involved a gift-sale-leaseback between a husband and wife. In Johnson v. Commissioner, 86 F.2d 710 (2d Cir. 1936), affg. 33 B.T.A. 1003 (1936), the husband funneled funds through his wife into a trust and then immediately borrowed the funds from the trust and deducted interest paid to the trust. The court held that the payments were not interest because the transfer of funds to the wife was not a