*38 Decision will be entered under Rule 50.
T, a physician, constructed a medical building in 1960 to meet the needs of his practice of ophthalmology, which he and his wife owned as community property. The building was occupied solely by T and his employees. Thereafter, in 1961, T and his wife conveyed their interests therein to trusts for the benefit of their four minor children for a period of about 15 years. T was named sole trustee of each of the trusts, and had the power, inter alia, to terminate any or all of the trusts after somewhat less than 11 years, and to sell, exchange, rent, repair, or encumber trust corpus, although he could not deal therewith at less than adequate consideration. T and his wife subsequently conveyed their reversionary interests in the property to their children on or about Dec. 20, 1963. During all the years in issue, 1961, 1962, and 1963, T occupied the medical building in his medical practice though no written lease was entered into between the trusts and T during any of those years. The stipulated fair rental value of the property was $ 7,200 per year during each of those years, but T paid, and deducted on income tax returns filed jointly*39 with his wife, "rent" of $ 9,000 per year. Held, T and his wife are not entitled to deduct any sums as "rent" in respect of such property. Van Zandt v. Commissioner, 341 F. 2d 440 (C.A. 5), affirming 40 T.C. 824; White v. Fitzpatrick, 193 F. 2d 398 (C.A. 2), certiorari denied 343 U.S. 928, followed.
*145 The Commissioner determined deficiencies in petitioner's income tax for the years 1961, 1962, and 1963 in the amounts of $ 5,170.03, $ 5,201.10, and $ 5,303.96, respectively. The sole issue presented arises out of petitioners' transfer of a building, designed and constructed exclusively for use by petitioner Sidney W. Penn in his medical practice, to eight trusts for petitioners' four minor children, of which Sidney Penn served as sole trustee. The precise question for decision is whether the Commissioner properly disallowed as a deduction payments made to these trusts by Sidney Penn as "rent" for the use of the medical building during the years in issue.
FINDINGS OF FACT
Some of the facts have been stipulated and, as stipulated, are incorporated herein by this reference together with accompanying exhibits.
The petitioners, Sidney W. Penn and Barbara F. Penn (hereinafter sometimes referred to individually as Sidney and Barbara, respectively), are husband and wife, and reside in Long Beach, Calif.*40 They timely filed joint income tax returns for the years 1961, 1962, and 1963 with the district director of internal revenue, Los Angeles, Calif.
Sidney is a physician, and has specialized as an ophthalmologist since 1947. For sometime prior to 1958 or 1959, he practiced in partnership with another physician, in a building located at 3650 Atlantic Avenue in Long Beach, Calif. About this time, however, the partnership was dissolved, and Sidney's interest in the building at 3650 Atlantic Avenue was also terminated. He thereupon decided to build his own medical facilities. On October 27, 1959, he and his wife acquired *146 as community property a parcel of real estate located at 3485 Linden Avenue, at a cost of $ 13,000, for this purpose.
Sidney hired a contractor to construct a building on this land, and worked with him in handling the subcontracts in order to keep costs down. The building was designed by an architect, according to Sidney's instructions and the needs of his practice. The building, completed in December 1960 at a total cost of $ 31,462.16, is constructed of frame, stucco, and stone, and is fully air conditioned. It contains approximately 1,875 square feet, *41 with five working areas, including offices, waiting rooms, business offices, a workshop for the nurses, and an employees' lounge. It is not encumbered by any mortgage or other lien. Though designed specifically for Sidney's practice, the building might be utilized for any medical practice, or, with some modifications, for other professional purposes.
Until the completion of the new medical building, Sidney continued to practice at 3650 Atlantic Avenue, and paid rent for his office space to his former partner. During the years in issue (1961, 1962, and 1963) and to the present time, petitioner has practiced in the medical building constructed by him at 3485 Linden Avenue; he is the only practicing physician in the building, and all other persons working there are his employees, including an optician.
Petitioners have four children, Jennifer, William, Thomas and James, who during the year 1961 were 7, 9, 11, and 14 years of age, respectively. At the end of 1960, Sidney, then age 42, discussed with his attorney, Myron Blumberg, his desire to find the best means of "setting away funds for the children's future." It had come to his attention through readings on the subject that the*42 use of trusts, in addition to providing a means of "setting away funds," was also a good method of saving taxes, and he was interested in saving taxes. The plan finally decided upon between Sidney and his attorney called for petitioners to create trusts for each of their children, with Sidney to serve as sole trustee of each trust, and to convey to such trusts the 3485 Linden Avenue property on which the medical building for Sidney's medical practice had been constructed. Sidney would pay "rent" to the trusts for his use of the building, thereby providing the funds to be "set away" for their children.
Sidney and Barbara each executed a "Declaration of Trust and Agreement," in 1961, whereby each created four trusts, one for each child. Sidney was the sole trustee of all the trusts. Both trust agreements were substantially identical, except for the grantor named therein. Thus, the instrument executed by Sidney identified the four trusts created by him as James Scott Penn Trust No. 1, Thomas Brian Penn Trust No. 1, William Jared Penn Trust No. 1, and Jennifer Susan Penn Trust No. 1; and the instrument executed by Barbara *147 identified the four trusts created by her as James*43 Scott Penn Trust No. 2, Thomas Brian Penn Trust No. 2, William Jared Penn Trust No. 2, and Jennifer Susan Penn Trust No. 2. By grant deeds petitioners first severed their community interests in the property, each acquiring a separate undivided one-half interest therein; and thereupon each executed four grant deeds to Sidney as trustee under the foregoing trusts, each deed conveying an undivided one-eighth interest in the property. Although the trust agreements and the deeds were all "dated" January 1, 1961, each deed was notarized by Sidney's attorney, Myron Blumberg, on July 17, 1961, and recorded on July 18, 1961. The deeds and trust agreements were not in fact executed prior to July 17, 1961.
Each trust agreement named Sidney as the trustee and Barbara as successor trustee. Although each agreement undertook to establish four trusts, the trustee was authorized to commingle the assets for purposes of management and investment. The trustee was directed to accumulate 25 percent of the net income of each trust until the beneficiary's majority and to pay 75 percent of the net income at least annually to or apply such amount for the benefit of the beneficiary until majority. Each*44 trust was to terminate December 31, 1975, or on the prior death of the beneficiary; but the trustee was given the unrestricted power to terminate any or all of the trusts at any time after December 31, 1971. Upon termination of any trust or upon attaining majority by the beneficiary, whichever event should occur first, the trustee was directed to pay all accumulated income of the trust to the beneficiary, and after attaining majority the net income was to be paid to the beneficiary at least semiannually until termination. If the beneficiary should die prior to termination of the trust for any other reason, all accumulated and undistributed income was to be paid to the estate of such beneficiary. Upon termination of any trust, the corpus was to "be paid and distributed to the Grantor or to the estate of the Grantor, if he is not then alive." Although the agreement provided that no part of the trust income was to be used to pay for maintenance or support of the beneficiaries during their minority, the trustee was given discretionary power to apply the income for the maintenance or support of the beneficiaries if he "ascertains that the economic status of the parents * * * is such*45 that said parents are currently unable to defray * * * [such] expenses." The trustee was also given discretionary power to invade corpus for the beneficiaries in the event of "emergency," involving "sickness, accident or other unusual circumstances." The trustee was further given broad powers over management and administration of the trust corpus, including the power to sell, exchange, or rent trust property "for terms ending during or after the termination of this trust," to make repairs and improvements to real *148 property, and to determine the extent to which such repairs and improvements should be apportioned between corpus and income. He was also empowered to encumber the trust property by mortgage or otherwise. He was authorized to "freely" exercise the various powers committed to him "notwithstanding that he may also be acting individually, or as trustee of other trusts," provided that he act in a "fiduciary capacity." The trust agreements further stated that no powers granted to the trustee were to be construed so as to enable the Grantor to purchase or deal with trust property for less than an adequate consideration or to borrow from the trusts without adequate interest*46 or security.
During the years 1961, 1962 and 1963, Sidney occupied the medical building at 3485 Linden Avenue as his place of business, but prior to 1964 no written lease agreement was entered into between Sidney and the trusts which formally held title to this property. Sidney did, however, make payments from funds in his personal checking account at the Bank of America, Bixley Knolls branch, to a checking account, No. XX194-1, opened in the name of "Sidney W. Penn, M.D. or Barbara F. Penn As Trustee for James, Thomas, William, and Jennifer Penn, Minors," at the Farmers' Merchant Bank in Long Beach, Calif., at the times and in the amounts set forth below:
| Apr. 21, 1961 | $ 1,000 |
| Nov. 1, 1961 | 2,000 |
| Dec. 24, 1961 | 6,000 |
| Apr. 12, 1962 | 1,500 |
| Sept. 12, 1962 | 1,500 |
| Dec. 28, 1962 | 6,000 |
| Mar. 5, 1963 | 1,500 |
| May 2, 1963 | 1,500 |
| July 24, 1963 | 1,500 |
| Dec. 31, 1963 | 4,500 |
These payments, which aggregated $ 9,000 annually, were reported as rental income by Sidney, as trustee, on Fiduciary Income Tax Returns, Form 1041, and were deducted by petitioners in the years paid as rental expense. The stipulated fair rental value of the property at 3485 Linden Avenue was no more than $ 7,200*47 per year.
During the years in issue, Sidney paid all the ordinary and necessary expenses of maintaining the medical building at 3485 Linden Avenue, from checking account No. XX194-1, as follows: 1961 $ 1,294.08; 1962 $ 1,431.84; 1963 $ 1,491.36. Such amounts were deducted by Sidney, as trustee, on the Fiduciary Income Tax Returns filed by him, and represented proper deductions under the Internal Revenue Code of 1954. Pursuant to the provisions of the trust agreements, he left approximately 25 percent of the net income of the trusts in checking account No. XX194-1, and distributed approximately 75 percent of the net income to savings accounts for each child. During the years in issue, the sums distributed to the savings accounts were retained in those accounts. Sidney did not withdraw any sums from these *149 savings accounts during this period for any purpose. Sidney did not receive any compensation for his services as trustee during the years in issue.
On or about December 20, 1963, Sidney and Barbara both conveyed their reversionary interests in the 3485 Linden Avenue property to their children by quitclaim deeds, dated as of January 1, 1963, which deeds were duly recorded*48 on December 20, 1963.
In his notice of deficiency to petitioners, the Commissioner disallowed, inter alia, a deduction of $ 9,000 claimed by petitioners as "rent" for each of the years 1961, 1962, and 1963. The parties have stipulated that if it is determined that such deductions for rent were properly disallowed, then petitioners shall be entitled to a depreciation allowance pursuant to section 167(b)(2), I.R.C. 1954, based upon a 45-year useful life of the medical building at 3485 Linden Avenue, and shall further be entitled to deduct all the ordinary and necessary expenses of maintaining such property during the years in issue, in the amounts actually paid as heretofore set forth. If, however, a rental deduction should be allowed for the period December 20, 1963 -- December 31, 1963, then a proportionate amount of such depreciation, and a portion of the expenses incurred in 1963, in the amount of $ 70, should not be allowed.
OPINION
Section 162(a) of the Internal Revenue Code of 1954 allows 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 *49 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." (Emphasis added.) Thus, a taxpayer who owns or has an "equity" in property used in his trade or business, though he is entitled in appropriate cases to depreciate the cost of that property over its useful life, sec. 167, I.R.C. 1954, and to deduct the ordinary and necessary expenses of maintaining it, sec. 162, supra, may not claim in place of or in addition to such amounts a deduction for its fair rental value, or any other sum, as rent. Though this proposition seems obvious enough, some taxpayer-owners have sought to avoid its impact through the now familiar technique of the sale and leaseback, which, in the intrafamily context such as that involved herein, often becomes the "gift" and leaseback. The mere transfer of legal title to property, however, is not conclusive for Federal income tax purposes, for the "sale" that lacks economic reality and business purpose, and the "gift" *150 that leaves the donor with substantially the same control over the property*50 that he had before, will simply be disregarded. See, e.g., W. H. Armston Co. v. Commissioner, 188 F. 2d 531 (C.A. 5), affirming 12 T.C. 539; Van Zandt v. Commissioner, 341 F. 2d 440 (C.A. 5), affirming 40 T.C. 824, certiorari denied 382 U.S. 814. Notwithstanding the transfers in trust by which petitioners conveyed a portion of their legal estate in the medical building used exclusively by petitioner Sidney Penn in his practice of ophthalmology, we think petitioners retained and indeed exercised sufficient dominion and control over such property during the years in issue as to justify their treatment as the true owners thereof for the purposes of section 162(a), so that they are precluded from deducting any sums as "rent" under that section in respect of such property.
The basic approach to be followed in cases such as this, involving intrafamily transfers in trust which divest the grantor of little more than bare legal title to the property transferred, and even that only temporarily, was outlined by the Supreme Court over 25 years*51 ago in Helvering v. Clifford, 309 U.S. 331, 334-335, as follows:
Technical considerations, niceties of the law of trusts or conveyances, or the legal paraphernalia which inventive genius may construct as a refuge from surtaxes should not obscure the basic issue. That issue is whether the grantor after the trust has been established may still be treated, * * * as the owner of the corpus. See Blair v. Commissioner, 300 U.S. 5, 12. In absence of more precise standards or guides supplied by statute or appropriate regulations, 1 the answer to that question must depend on an analysis of the terms of the trust and all the circumstances attendant on its creation and operation. And where the grantor is the trustee and the beneficiaries are members of his family group, special scrutiny of the arrangement is necessary * * * [Footnote omitted.]
Clifford, it is true, dealt with the question of whether the grantor of a trust might be taxed upon the trust's income under the predecessor of section 61, I.R.C. 1954, but the principles enunciated therein are equally applicable, and have previously been applied, in determining*52 whether a "donor" has retained such dominion and control over his "gift" to a family member as to prevent him from deducting "rents" and "royalties" paid to such family member for his use of the "donated" property. White v. Fitzpatrick, 193 F. 2d 398 (C.A. 2), certiorari denied 343 U.S. 928. And though "precise standards or guides," including the so-called 10-year rule, have since been supplied by Congress with respect to the inclusion of trust income in the income of the grantor on the grounds of his dominion and control over the trust, see secs. 671- 677, I.R.C. 1954, those standards have "no application in determining the right of a grantor to deductions for payments to a trust under a transfer and leaseback arrangement." S. Rept. No. 1622, 83d Cong., 2d Sess., p. 365 (1954).
*151 Taking the approach indicated by Clifford, then, we have no doubt that petitioners must be considered the owners of the medical building both before and after their transfers in trust. Prior to the construction of this building, Sidney had been in practice with another physician, but that partnership was dissolved and Sidney decided*53 to go out on his own and to build his own medical facilities. He acquired a plot of land and personally supervised the design and construction of a medical building thereon which would meet the needs of his practice. There was no question, either before or after the transfer of the building to the children's trusts, that it would be used by him in his practice; indeed, this was obviously the very purpose of his buying the land and constructing the building. He did in fact occupy the medical building after its completion and after the transfers in trust, 1 and it has been used exclusively in connection with his medical practice ever since.
*54 The transfer of the building to eight trusts for the benefit of their four children did not, then, cause any change in petitioners' planned use of the building and an examination of the terms of the trust agreements shows how little petitioners actually did give up. Sidney was named sole trustee of each of the trusts, and Barbara was to serve as successor trustee in the event of his death, resignation, or incapacity. Petitioners retained a reversion in the building which, for all practical purposes, could take effect in somewhat less than 11 years after the trusts were created, since Sidney as sole trustee could declare any or all of the eight trusts at an end after December 31, 1967. As sole trustee, Sidney also had discretionary powers over trust income (if he ascertained that "the economic status of the parents of a minor beneficiary * * * [was such] that said parents * * * [were] currently unable to defray the ordinary and customary expenses of support, maintenance, welfare or education of such beneficiary"), and the invasion of the trust corpus (in the event of any "emergency" in the affairs of the beneficiaries by reason of "sickness, accident or other unusual circumstances"). *55 More significant, however, were the powers Sidney retained over the administration of the trust corpus, including *152 of course the medical building in respect of which petitioners claim to be entitled to deductions for rent. He had, inter alia, the power to sell or exchange all trust property, to rent or lease it "for terms ending during or after the termination of this trust," to make repairs and improvements to real property and to determine the extent to which such repairs and improvements should be apportioned between principal and income, and to encumber trust property by mortgage or otherwise. And he could freely exercise such powers "notwithstanding that he may also be acting individually, or as trustee of other trusts" so long as he acted in a "fiduciary capacity."
The informal manner in which Sidney acted after the conveyance of the medical building to his children's trusts lends further support to the conclusion that he (and his wife) remained the true owners of such property. For, although Sidney occupied the medical building during each of the years 1961, 1962, and 1963, there was no written lease between Sidney, as trustee, and Sidney individually, during*56 any of these years which granted him the right of possession. Perhaps the absence of a written lease would not be important in determining the availability of a deduction for rent under section 162(a)(3) where the parties have dealt with one another at arm's length. However, in light of the obvious possibilities of abuse, where a taxpayer enters into such transaction with members of his family group, or with himself acting in another capacity, without specifically setting forth the consequences of the transaction, the rights and obligations of the parties, in some formal, binding way, there may be serious question as to whether payments made in such circumstances qualify as bona fide rent under the statute. Certainly, the method by which Sidney allegedly rented the medical building to himself during the years in issue cannot withstand the "special scrutiny" which must be accorded all such transactions. For example, rent is ordinarily paid monthly or at some other stated interval, yet Sidney's payments were of such random character, both as to amount and time, as to indicate that they were made solely at his convenience without regard to any fixed legal obligation. Moreover, the*57 payments of "rent" made by Sidney from time to time during 1961, 1962, and 1963, aggregating $ 9,000 per year, were in excess of $ 7,200 which the parties have stipulated was the fair rental value of the property during those years. Cf. Kirschenmann v. Westover, 225 F. 2d 69 (C.A. 9), certiorari denied 350 U.S. 834. Finally, although the property was not transferred to the trusts prior to July 17, 1961, footnote 1, supra, petitioners claimed a rental deduction of $ 9,000 for the entire calendar year 1961, thereby casting further doubt upon the bona fides of the entire transaction and providing further support for the conclusion that it lacked economic reality and *153 was intended merely as an artificial reallocation of income within the immediate family that will not be given effect for tax purposes. Cf. Van Zandt v. Commissioner, 341 F. 2d 440 (C.A. 5), affirming 40 T.C. 824, certiorari denied 382 U.S. 814; Furman v. Commissioner, 381 F. 2d 22 (C.A. 5), affirming 45 T.C. 360.*58
In light of all the facts and circumstances surrounding the creation and operation of the trusts, including the fact that the tax-savings purpose obviously played a significant part in the "gift"-leaseback arangement, cf. Van Zandt v. Commissioner, 341 F. 2d at 441-442, and the terms of the trusts themselves, most especially the administrative powers of control over trust property retained by Sidney as sole trustee, we find that petitioners remained the true owners of the medical building and that they are therefore not entitled to deduct any amounts as "rent" for its use during 1961, 1962, and 1963. Cf. Helvering v. Clifford, supra. To be sure, as petitioners point out, the attributes of ownership in the medical building which were retained in the trust agreements, such as the right to sell, lease, improve, and encumber the property, may not be exercised as freely after the conveyance in trust as they were before, since the law of trusts now imposes fiduciary responsibilities upon Sidney as trustee. But the dilution in control which such fiduciary obligations effect is not deemed significant where "as a result*59 of the terms of the trust and the intimacy of the familial relationship * * * [the taxpayer has] retained the substance of full enjoyment of all the rights which previously he had in the property. That might not be true if only strictly legal rights were considered. But when the benefits flowing to him indirectly through * * * [other members of the family group] are added to the legal rights he retained, the aggregate may be said to be a fair equivalent of what he previously had." See Helvering v. Clifford, 309 U.S. 331, 335-336.
The cases of Skemp v. Commissioner, 168 F. 2d 598 (C.A. 7) reversing 8 T.C. 415, and Brown v. Commissioner, 180 F. 2d 926 (C.A. 3), reversing 12 T.C. 1095, relied upon by petitioners, are distinguishable. In those cases, this Court held that no deduction for rent was allowable to a taxpayer after an intrafamily gift in trust and leaseback, even where he had transferred his entire interest in the trust property and had no control over the trustee, if by the terms of the trust agreement or by informal*60 agreement with the trustee, it had previously been arranged for the property to be immediately leased back to the taxpayer. The Courts of Appeal for the Seventh and Third Circuits reversed on the grounds that, once it is determined that the transfer "wholly * * * [divested] the taxpayer of any interest in the trust *154 property" and "a new independent owner" comes into the picture, an arm's-length agreement to pay reasonable rentals must be recognized for tax purposes. Skemp v. Commissioner, 168 F. 2d at 599-560, Brown v. Commissioner, 180 F. 2d at 929, followed in Albert T. Felix, 21 T.C. 794. These cases obviously have no application where, as here, there has not been a complete divestiture by the grantor of his interest in the trust property to a new, "independent" owner, and the "rentals" paid were not reasonable in amount. Indeed, the fact that such cases involved an "independent trustee" has frequently been referred to as an important or distinguishing feature. See Ingle Coal Corporation v. Commissioner, 174 F. 2d 569, 572 (C.A. 7), *61 affirming 10 T.C. 1199; White v. Fitzpatrick, 193 F. 2d at 401-402 (C.A. 2); Hall v. United States, 208 F. Supp. 584, 588 (N.D. N.Y.); I. L. Van Zandt, 40 T.C. at 830; Alden B. Oakes, 44 T.C. 524, 529; Irvine K. Furman, 45 T.C. 360, 364, affirmed 381 F. 2d 22 (C.A. 5). Also, it should be noted that the Skemp and Brown cases were referred to by the Court of Appeals in White v. Fitzpatrick, 193 F. 2d at 401, as going "to the verge of the law in support of what are essentially intrafamily transfers." See also Hall v. United States, 208 F. Supp. at 588.
Finally, petitioners insist that the conveyance of their reversionary interests in the trust property to their children in 1963 completely divested them of any interest in the property, and that, at least after such time, they should be allowed a deduction for rent. It should be noted initially that although the quitclaim deeds by which petitioners*62 conveyed their reversionary interests were "dated" as of January 1, 1963, they were not notarized until December 18, 1963, and were not recorded until December 20, 1963, and petitioners do not claim that their conveyance should be taken into account in determining the allowability of their rental deduction before December 20, 1963. Thus, at best petitioners would be allowed to deduct 11/365 of the fair rental value (not the actual "rent" paid) of the property in 1963 if their position should be sustained. But we do not think it should be. In view of all the facts and circumstances, including the extensive administrative powers still retained by Sidney as trustee after December 20, 1963, the fact that he occupied the property without any written lease throughout 1963, and the fact that the rents actually paid were unreasonable in amount, we feel justified in concluding that petitioners' dominion and control over the trust property was not significantly diminished by the conveyance of their reversionary interests therein within the family group, and that they are not entitled to any deduction for rent under section 162(a) for the year 1963, or any portion thereof.
Decision will*63 be entered under Rule 50.
Footnotes
1. He occupied the property for some months prior to transferring it to the trusts. The record shows that the building was completed in December 1960, and petitioners would have us believe that it was promptly transferred to the trusts on Jan. 1, 1961. Although it is true that the deeds to the trusts are "dated" Jan. 1, 1961, it is clear that they were prepared by petitioners' attorney, Myron Blumberg, who notarized the deeds on July 17, 1961, which were in fact recorded on July 18, 1961. On this state of the record, bearing in mind that the burden of proof was on petitioners, it is a reasonable inference that the deeds were not executed prior to July 17, 1761, and we have drawn that inference in our findings of fact. Moreover, since the deeds and the trust agreements were part of the same package prepared by Mr. Blumberg, we have drawn the further inference, in the absence of any convincing evidence to the contrary, that the trust agreements similarly were not executed prior to July 17, 1961.↩