quired the board of directors to authorize the charitable contribution in writing. We held that the requirement that the authorization must be in writing was an invalid limitation on the deduction and inconsistent with the statute. The Commissioner acquiesced in that case. 1953-1 C.B. 4.

In my view, holding a portion of the regulations invalid herein goes no further than we went in Faucette, and I would, therefore, hold for petitioner on such grounds.

WILES, J., agrees with this concurring opinion.

RAUM, J., dissenting: Notwithstanding what is said in the prevailing opinion, it in effect nullifies the provisions of section 1.170-3(b) of the Income Tax Regulations. However, "Treasury regulations must be sustained unless unreasonable and plainly inconsistent with the revenue statutes and *** should not be overruled except for weighty reasons." Commissioner v. South Texas Co., 333 U.S. 496, 501. In my judgment, these regulations are not "unreasonable," nor are they "inconsistent"-certainly not "plainly" inconsistent-with the statute, and I know of no "weighty" reasons, nor have any been suggested, why they should be overruled. Moreover, to say that there has been "substantial compliance" with the regulations when the sworn statement required to be filed with the return was made available for the first time some years later, after the case had been submitted to the Court and while it was sub judice, is merely to play with words.

QUEALY, J., agrees with this dissent.

C. JAMES MATHEWS AND JOYCE C. MATHEWS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4401-69. Filed October 3, 1973.

1. Petitioners, husband and wife, created several 10-year trusts for the benefit of their minor children to which they transferred property used in the husband's trade or business, which he in turn leased back from the trusts. Held, on the facts, the rentals paid constitute ordinary and necessary business expenses, and petitioners' reversionary interest was not a disqualifying “equity” in the property within the meaning of sec. 162(a) (3) and did not preclude petitioners from deducting the reasonable rent paid to the trusts for the use and possession of the term-of-years held by the trusts.

2. Petitioners failed to substantiate by adequate records or corroborating evidence certain claimed business expenses, business gifts, and club dues.

3. Legal fees incurred in connection with the establishment of an irrevocable trust for the benefit of petitioners' children are nondeductible personal expenses.

4. Petitioners failed to prove that a loan payable to them became worthless in the year in issue.

Thomas D. Aitken, for the petitioners.

Charles L. Dunlap, for the respondent.

HALL, Judge:* Respondent determined deficiencies in petitioners' Federal income taxes as follows:

(1) During the years 1964, 1965, and 1966, are petitioners entitled to rental deductions with respect to payments made to four family trusts?

(2) During the years 1964, 1965, and 1966, are petitioners entitled to business deductions in an amount in excess of that allowed by respondent with respect to business entertainment expenses, business gifts, and club dues claimed by petitioners?

(3) Are petitioners entitled to a business expense deduction of $750 in 1966 for legal fees paid for the drafting of an irrevocable family trust?

(4) Did Joseph Staley's promissory note, payable to petitioner C. James Mathews, become worthless in 1966?

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly. Petitioners are husband and wife, and resided in St. Petersburg, Fla., at the time they filed their petition herein. Their joint Federal income tax returns for the years in issue were filed with the district director in Jacksonville, Fla.

1. Rental Deduction

During each of the years involved, C. James Mathews (herein referred to individually as petitioner) was a funeral director operating Mathews Funeral Home in St. Petersburg, Fla. Prior to November 1,

*Pursuant to a notice of reassignment sent to counsel for the parties, and to which no objections were filed, this case was reassigned by the Chief Judge on Oct. 16, 1972, from Judge Craig S. Atkins to Judge Cynthia Holcomb Hall for disposition.

1961, petitioners owned the real property on which the Mathews Funeral Home is located. On or about November 1, 1961, petitioners, as grantors, executed four trust instruments, each creating a separate irrevocable trust for one of their four minor children, and transferred to their attorney Richard F. Logan, as trustee of the trusts, four equal undivided interests in the above-mentioned real property. The property was transferred by warranty deed, dated November 1, 1961, which was duly recorded. Each trust provided that it would terminate 10 years and 1 day after execution of the trusts, whereupon the principal of the trust was to be distributed to the grantors or their estates. During the term of the trusts the net income was to be distributed currently to the beneficiary. Petitioner's wife was appointed legal guardian of the four minor children who were the beneficiaries of the four trusts.

During the years in issue the trustee, Richard F. Logan, at all times carried on his fiduciary duties independently of petitioners, for the primary benefit of the trust beneficiaries, and in accordance with the broad powers granted him by the terms of the four trusts. In such capacity he managed the property, collected the rents, paid the expenses, negotiated lease renewals as needed, and paid out the income of the trusts as required by the terms of the trust instruments.

On or about November 1, 1961, the day the trusts were executed, the trustee leased the real property to petitioner who continued to operate the premises as a funeral home. This transaction was prearranged. On February 1, 1963, the trustee and petitioner entered into a new lease of the property for a term of 52 weeks at a total rent of $14,040, payable at the rate of $270 per week. This sum was calculated to produce a profit for the trusts after all expenses. Petitioner was given the option to renew the lease "from year to year upon such terms as shall be mutually agreeable to the parties." This lease, or renewals thereof, was in effect during the years in question. Petitioner paid $14,310, $14,040, and $14,040 as rent for the calendar years 1964, 1965, and 1966, respectively, and deducted these amounts on petitioners' joint Federal income tax returns for those years. The payments were included in the income reported by the four trusts for their fiscal years ending January 31, 1964 through 1967. The rent paid during 1964, 1965, and 1966 was a reasonable rent for the premises.

In order to protect petitioners from possible adverse tax consequences, and because petitioners later became willing and able to relinquish their reversionary interests in the trusts, petitioners executed a subsequent trust agreement on May 23, 1966, whereby they transferred their reversionary interests in the funeral home property to a

new irrevocable trust for the benefit of their four children. The transfer to the 1966 trust was by quitclaim deed dated May 23, 1966, which was duly recorded on June 1, 1966.

Respondent disallowed petitioners' rental deductions for the calendar years 1964 and 1965 and the period January 1 to May 23, 1966, to the extent of $4,740.65, $5,166.43, and $2,042.22, respectively. These amounts were arrived at by deducting from the gross rent paid to the four trusts the taxes, depreciation, interest, and other expenses associated with the funeral home property. Respondent allowed the deduction of rental payments to the trust from and after petitioners' transfer of their reversionary interests to the 1966 trust on May 23, 1966.

2. Entertainment Expenses, Business Gifts, and Club Dues Respondent disallowed the following amounts claimed by petitioners as business entertainment expenses and business gifts:

Disallowance of certain of these expenses has been accepted by petitioners. The expenses still in issue were for alleged business entertainment at the Lakewood Country Club, the St. Petersburg Yacht Club, the Sand Dollar Restaurant, the Port-O-Call Restaurant, the Sheraton Inn, and the petitioners' home, and for certain alleged business gifts given by petitioners.

In addition, respondent disallowed petitioners' claimed deductions for club dues as follows:

Disallowance of certain of these club dues has been accepted by petitioners. The club dues still in issue were for dues paid to the Lakewood Country Club and the St. Petersburg Yacht Club.

During the years in issue, petitioner deducted as business expenses portions of his monthly bills from the Lakewood Country Club. Petitioner was an active member of the Lakewood Country Club, and during 1964, 1965, and 1966 frequently entertained people there by buying them food and drinks, especially after a golf game. Petitioner kept no contemporaneous or substantially contemporaneous records of the persons he entertained at the club. Petitioner believed that if during any

such entertaining he made a friend or acquaintance aware of the fact he was a funeral director, the expense of entertaining that friend or acquaintance was a deductible business expense. Petitioner's family also used the Lakewood Country Club, and petitioner's wife, like petitioner, frequently played golf. Petitioners deducted the expenses for the activities they believed were business related and did not deduct the expenses for activities they believed were personal and nonbusiness. Petitioners also deducted a portion of the Lakewood Country Club dues.

Petitioner was also a member of the St. Petersburg Yacht Club and he deducted as business expenses a portion of his yacht club bills during the years in issue. One amount was for drinks purchased for a number of petitioner's friends on the occasion of a benefit dinner for the Science Center. Petitioner regarded these friends as a possible source of business. Another amount was for cocktails for friends prior to the annual Black and White Ball. Petitioner usually took the same group of people to the Ball each year. Another amount was for a cocktail and dinner party in 1966 honoring petitioner's wife's birthday which was attended by about 15 friends. Again petitioner kept no substantially contemporaneous record of his entertaining at the St. Petersburg Yacht Club, but he deducted the amount of his total club bills and club dues he believed to be business related.

During the years in issue petitioner often took salesmen (particularly casket salesmen Joseph Staley and Art Christy) to the Sand Dollar for lunch and deducted the cost thereof as a business expense. Petitioner and his guests ate in the businessmen's luncheon room which petitioner regards as quiet and conducive to carrying on business. The salesmen and petitioner would alternate buying each other lunch. Business was generally discussed in some manner or form during these luncheons. Petitioner kept no substantially contemporaneous records of his luncheon expenses at the Sand Dollar. In addition to lunching with salesmen at the Sand Dollar, petitioner ate lunch with the finance committee of his church, and from time to time entertained family and friends there. Petitioner deducted the meals he believed to be business related.

During the period in issue petitioners deducted certain expenses at the Port-O-Call, a restaurant and motel complex in St. Petersburg. Petitioner gave various parties there. In 1964 petitioner gave a party in honor of his wife's birthday. On that occasion petitioner asked a number of friends for cocktails in a private room followed by dinner in the main dining room to the music of Guy Lombardo. Preceding the cocktail and dinner party at the Port-O-Call, petitioner held a cocktail party at his home and deducted its cost as a business expense.