A "gift-leaseback" generally occurs when the owner of a trade or business asset transfers the asset as a gift in trust for the benefit of the children (or other low-bracket family members) and then has the independent trustee lease back the asset to the business for fair rental value.The rent is deducted as a §162 business expense according to the terms of a written lease.IRS argues that this is not a business expense because

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The IRS argues that there is no valid business purpose for a gift-leaseback arrangement, as a legitimate business would typically purchase an asset rather than lease it, and the trust cannot engage in business transactions without potentially breaching its fiduciary duty to prudently manage the trust corpus. Therefore, the deduction for rental payments in a gift-leaseback arrangement is disallowed as a non-business expense.

A "Gift-Leaseback" Generally Occurs When the Owner of a Trade