Your client, Gary Gearbox, wholly owned and worked full time for a C corporation in the business of repairing autos. His wife, Tammy, wholly owned and worked full time for another C corporation the provided mobile auto-windshield repairs. Both corporations' offices were located in the Gearboxes' home. The corporations paid the Gearboxes rent for the use of this office space. In addition to renting this portion of their home, the Gearboxes also owned five rental properties. On their last three tax returns, the Gearboxes reported net income from leasing office space to their C corporations of $40,000, $24,000 and $22,000, respectively. During these years, the combined losses from the five other rental properties exceeded the income derived from their office leases. On their last three tax returns, the Gearboxes offset the losses from the rental properties against the income from the office leases and, as a result, paid no tax on the rental income paid to them by their corporation.

After appropriate research to determine if Gary and Tammy correctly reported the rental income, prepare (in good form) a research memorandum to the file.