a lessee's ownership rights in an asset held concurrently with, but not derived from, the lessor's property rights or enlarged through the rental payments. If, for example, a lessee was at all times the owner of a 50-percent undivided interest in a parcel of land, would he be precluded by section 162(a)(3) from deducting the rental paid to his coowner for the use of the latter's rights? In answer to this question, we must of course set aside the particular facts of the present case, with its overtones of careful tax planning, for if the term "equity" has in the present context the broad meaning for which respondent argues, it must have the same meaning where no tax plan is involved. We gain some help from the language of the statute. The language "property to which the taxpayer has not taken or is not taking title" (emphasis added) appears clearly enough to indicate that Congress had in mind an ongoing process in which the taxpayer takes (not "has") title to the property, evidently from the lessor through the purported rental payments. It is difficult to read into this language a prohibition on preexisting ownership of property rights in the asset other than those owned or purportedly owned by the lessor and the subject of the lease. We note, furthermore, that the disjunctive “or” rather than the conjunctive "and" is used after the phrase "the taxpayer has not taken or is not taking title." Literally, the rent would therefore pass muster if the taxpayer "has not taken or is not taking title" without regard to whether he has an "equity"; and even if title is taken, the rental for the property would still not be rendered nondeductible by the "taking title" language unless the taxpayer has an equity. Whether or not this reading is warranted, however, the disjunctive at the least seems to render it clearer that Congress intended the "or" clause to be read in conjunction with the preceding language. This would suggest that the kind of "equity" in the "property" referred to must be one "taken" (from the lessor), or at least overlapping a purported ownership interest of the lessor.

The statutory language, however, is so murky that it is too frail a reed to lean on alone. While it appears from the foregoing that Congress probably intended to disqualify an equity taken (from the lessor) rather than a preexisting ownership interest not derived from or enlarged under the lease, the language literally refers to the taxpayer having rather than taking an equity, and the disjunctive "or" may have been an oversight. We rest our conclusion therefore primarily on the fact that respondent's construction would produce such anomalous and unfair tax results in the present context that we cannot hold that Congress could have intended such construction without com

Without adverting to the literally disjunctive phraseology, Oesterreich v. Commissioner, 226 F. 2d 798 (C.A. 9, 1955), reads the requirements of the statute in the conjunctive.

pelling evidence that this was its intent. Where respondent applies section 162 (a) (3) to a purported lease which is really a sale, no injustice is done. The payment in such case enlarges the taxpayer's ownership rights and may in due course be recovered taxwise. But here, the rental payments did not enlarge petitioner's ownership. They were clearly ordinary and necessary business expenses attributable to the years in issue. If they are nondeductible, they may not be capitalized. They purchase nothing of value beyond the years in issue. They will simply be lost. Therefore, the effect of respondent's argument is to require a systematic overstatement of petitioner's net income for each year in which a part of the bona fide and necessary cost of earning that income was the rental payment in question. We are therefore of the view that section 162 (a) (3) should not be read to cause rental payments to become nondeductible merely by virtue of a lessee's property rights in an asset, which rights are not derived from the lessor or under the lease, and which will become possessory only after the lease expires.

Under respondent's interpretation, the owner of a reversion to become possessory only after a 99-year lease would apparently be precluded from deducting bona fide rentals paid for a 10-year sublease. Anybody else entering into such a sublease could surely deduct his rental payments, and we see no good reason to attribute to the Congress the desire to distort the measurement of income by prohibiting such a deduction to the reversioner alone. Likewise, respondent's interpretation would seem to bar the owner of an undivided interest in an asset from leasing the remaining interests from his coowners, and this for no good reason which has been pointed out to us. In order to avoid ascribing to the Congress so capricious a limitation on the rental deduction, we hold that the property in which the taxpayer should have no equity does not include a reversionary interest, not derived from the lease or from the lessor, which is scheduled to become possessory after the expiration of a lessor's term of years.

This approach to section 162 (a) (3) is consonant with the holding of Abramson v. United States, 133 F. Supp. 677 (S.D. Iowa 1955). In that case, certain rental payments under a lease were applied or credited on the lessee's purchase price of certain items, but other rental payments, not included in the purchase price, and therefore not going to build an "equity," were allowed as deductions. Under the sensible Abramson approach, section 162 (a) (3) prohibits the current deduction of a capitalizable item; it does not operate so as to prevent a taxpayer from deducting rental payments in circumstances where the payments are not appropriate additions to a basis account. In this regard, to the extent they may be inconsistent with the views expressed

herein, we disagree with Gibbons v. United States, an unreported case (D. N.Mex 1970, 25 A.F.T.R. 2d 70-1332, 70-1 U.S.T.C. par. 9365), and the alternative holding in Hall v. United States, 208 F. Supp. 584 (N.D. N.Y. 1962).

In Alden B. Oakes, supra, this Court did not have to decide whether the mere retention of a reversionary interest in the property constituted a disqualifying equity interest, because the Court there found that the taxpayer "had no ‘equity' in the property after [he relinquished his reversionary interest] and during most of the time covered by the years in issue." 44 T.C. at 531.6

Finally, respondent contends that under our decision in Jack E. Golsen, 54 T.C. 742 (1970), affd. 445 F. 2d 985 (C.A. 10, 1971), we are required by decisions of the Court of Appeals for the Fifth Circuit, to which appeal herein will lie, to disallow the rental deduction here. We disagree with respondent's reading of these cases. In Chace v. United States, 303 F. Supp. 513 (M.D. Fla. 1969), affirmed per curiam 422 F. 2d 292 (C.A. 5, 1970), the District Court for the Middle District of Florida held that the grantor-lessee in that case was not entitled to a rental deduction, finding that the facts in Chace were almost identical with the facts in Van Zandt v. Commissioner, supra, and that Chace clearly fell within the holding of Van Zandt. The Fifth Circuit, in affirming Chace per curiam, cited Furman v. Commissioner, 381 F.2d 22 (C.A. 5, 1967), affirming per curiam 45 T.C. 360 (1966), and Van Zandt. The facts in the instant case are clearly distinguishable from the facts in Chace, Furman, and Van Zandt, most notably in our crucial finding that the trustee in the instant case is independent. Chace also held, in an alternative holding, that the taxpayer retained a disqualifying equity in the property, apparently relying primarily on the fact that the grantor-lessee had the right under the lease agreement to renew the initial 3-year term of the lease for three additional periods of 3 years at the same rental as the original term, the options to renew exceeding the term of the 10-year trust. This circumstance, of course, left the trustee with no real opportunity to exercise genuine control over the property. This was (we think properly) construed by the court in Chace as inconsistent with the genuine relinquishment of control to an independent trustee which has been held to be required for deduction of rentals after a gift and leaseback. Clearly the alternative holding does not stand for the proposi

Moreover, in Irvine K. Furman, 45 T.C. 360, 366 (1966), affirmed per curiam 381 F. 2d 22 (C.A. 5, 1967), the Court specifically expressed no opinion on this issue. See also Sidney W. Penn, 51 T.C. 144, 154 (1968), where this Court held that under the facts of that case the release of the reversionary interest did not thereafter entitle the taxpayers to deduct thier rental payments because taxpayers' "dominion and control over the trust property was not significantly diminished by the conveyance of their reversionary interests."

tion that a reversionary interest, standing by itself, is a disqualifying equity in the property, as the respondent contends in the instant case. Because Chace, which was affirmed by the Fifth Circuit, is not in point with respect to the issue we must decide and is distinguishable on its facts, our decision in Jack E. Golsen, supra, does not require a decision against petitioners on this issue. Estate of George I. Speer, 57 T.C. 804, 812 (1972); Wayman A. Collins, 56 T.C. 1074, 1078 (1971); Motel Corp., 54 T.C. 1433, 1439 (1970).

2. Entertainment Expenses, Business Gifts, and Club Dues Petitioners contend they are entitled to deduct the entertainment expenses, costs of business gifts, and club dues in issue as ordinary and necessary business expenses within the meaning of section 162, and, further, that they have met the substantiation and other requirements of section 274. Respondent asserts that petitioners have failed to show that such expenditures meet the requirements of either section 162 or section 274. We hold that regardless of whether petitioners' entertainment expenses, costs of business gifts, or club dues constituted ordinary and necessary business expenses deductible under section 162, petitioners have failed to substantiate those expenses by adequate records or other sufficient evidence, and that therefore these expenses are disallowed pursuant to section 274(d) and the regulations thereunder.

Section 274(d) provides that entertainment expenses and the expense of gifts and club dues are not allowable as deductions "unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense *** (B) the time and place of the *** entertainment, * * * or use of the [club], or the date and description of the gift, (C) the business purpose of the expense * * *, and (D) the business relationship to the taxpayer of persons entertained, using the [club], or receiving the gift."

The regulations (section 1.274–5(c)) provide that “adequate records" consist of an account book or diary or similar record in which the elements of the expenditures are recorded at or near the time of the expenditure. In this case petitioner admits that he cannot meet the adequate records requirement of the statute and regulations since he maintained no contemporaneous diary of the entertainment expenses or gifts or of the use of the clubs. The question, therefore, is whether he has substantiated the expenses by sufficient evidence corroborating his oral testimony. The regulations (section 1.274-5 (c) (3)) require such substantiation by a written statement containing detailed information on each element," and other corroborative evi

7 The elements in the case of entertainment expenses are the amount, time, place, business purpose, and business relationship of those entertained; and in the case of a gift the amount, time, description of the gift, business purpose, and business relationship of the recipient.

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dence sufficient to establish such elements. The type of corroborative evidence required is (1) the testimony of the person entertained or the recipient of the gift, or of other witnesses, setting forth detailed evidence of the elements, or (2) documentary evidence proving such elements. However, circumstantial evidence may be used to establish the business purpose or the business relationship.

The Second Circuit has held that the taxpayer's detailed statement need not be in writing, and that the portion of the regulations requiring a written statement is invalid. LaForge v. Commissioner, 434 F. 2d 370 (C.A. 2, 1970), reversing on this issue 53 T.C. 41 (1969). In other words, the taxpayer's oral testimony, properly corroborated, is sufficient to establish the section 274 elements of business entertainment expenses or the expense of business gifts. Both the Second Circuit and the Tax Court have strictly interpreted the LaForge case in determining what is sufficient corroboration of the taxpayer's oral testimony as to the amount, time, place, and business purpose of the expenditures. Hughes v. Commissioner, 451 F. 2d 975 (C.A. 2, 1971), affirming a Memorandum Opinion of this Court; Norman E. Kennelly, 56 T.C. 936 (1971), affirmed in open court without opinion 456 F. 2d 1335 (C.A. 2, 1972).

In this case, petitioner went back over his bills, receipts, and canceled checks after the Commissioner commenced his audit of the years in issue and tried to the best of his recollection to separate personal expenses from business expenses. These bills, receipts, and canceled checks have no notations as to the amount of the business expense, the business purpose of the entertainment or gift, or the business relationship of petitioners to the recipients of the entertainment or gifts. Petitioner's memory is vague and unspecific, and his testimony was unconvincing. The only elements established by the bills, receipts, and canceled checks are the time, place, and amount of both the personal and business expenditures of petitioners at various restaurants and clubs, and not the business portion thereof. Moreover, petitioners have failed to substantiate the business purpose of the various claimed expenditures or the business relationships of the parties by documentary or circumstantial evidence.

The testimony of the Lakewood Country Club golf professional and bartender added nothing except to establish that petitioners were at the club often. The witnesses were not in a position to nor did they establish the business purpose or business relationships of any of the entertaining petitioners did at the club.

We find that there has not been sufficient corroboration of taxpayer's oral testimony to meet the requirements of section 274 (d) with regard