CASE 22 Gift and Leaseback R. Bruce Baxter and Sam Dixon were CPAs practicing tax accounting in Clearview, Wyoming. In 20x1, Baxter and Dixon incorporated under the Professional Corporation Statute of Wyoming and became Baxter and Dixon, P.C. Because of new business moving into Wyoming, the rm's practice mushroomed and needed larger quarters. Baxter and Dixon decided that the rm's move presented them with an opportunity to divert some of their income to their families. They formulated the following plan. 1. Baxter and Dixon, P.C., contracted with a local builder to construct a three-story office building that would be large enough for the firm's expected future needs. 2. After the building was completed in May 20KB, Baxter and Dixon, P.C., transferred the property to a 10-year, 6-month irrevocable trust established by Baxter and Dixon forthe benefit of each man's children. 3. The interest in the property reverts to the children at the end of the trust term. 4. The professional corporation leased the building from the trust at a flat rate of $80,000 per year. There were no other tenants. 5. The trustee of the trust was the First National Bank of Clearview. 6. The term of the lease was 10 years and 6 months. Under this arrangement, the professional corporation deducted all lease payments to the trust and the beneciaries of the trust paid income tax on the money they received as income. The IRS stepped in and challenged this result by disregarding the trust and holding that the lease deductions were not valid. Baxter and Dixon ask your advice about the validity of their arrangement and its ability to withstand the IRS attack