to the business entertainment expenses or cost of the business gifts in issue in this case.

In order to be able to deduct any part of the club dues paid to the Lakewood Country Club and the St. Petersburg Yacht Club, petitioners must establish that the clubs were used "primarily for the furtherance of the taxpayer's trade or business." Sec. 274 (a) (1) (B) and (2)(A). Petitioners are required to maintain records of the use of a club to establish that its primary use was business related rather than personal. "If a taxpayer fails to maintain adequate records concerning a [club] which is likely to serve the personal purposes of the taxpayer, it shall be presumed that the use of such [club] was primarily personal." Sec. 1.274-5 (c) (6) (iii), Income Tax Regs.

Petitioners have failed to carry their burden of proof that the clubs were used primarily for business purposes, and therefore no part of the dues for either club is deductible.

3. Legal Fees

Petitioners contend the $750 in legal fees paid in connection with establishing the 1966 irrevocable family trust is a deductible business expense. Respondent contends it was a nondeductible personal expense, and we agree.

We hold that the primary purpose in establishing the 1966 trust was to make a gift in trust of the petitioners' reversionary interest in the funeral home property to their children. As such, the legal fees paid petitioners' lawyer to establish the trust were a nondeductible personal expense.

4. Worthless Note

Petitioner contends that his loan to Staley, evidenced by a demand note, became worthless in 1966. Respondent asserts that petitioners have failed to prove that the loan became worthless in 1966, and we agree.

Petitioner claimed the $2,500 note became worthless within 311⁄2 months after it was created, but petitioner, on whom the burden of proof rests, has failed to prove that the debt both (1) was not worthless when created on September 16, 1966 (Russell Box Co. v. Commissioner, 208 F.2d 452, 455-456 (C.A. 1, 1953), affirming a Memorandum Opinion of this Court), and (2) became worthless before the end of 1966 (section 166(d) (1) (B)). Petitioner has failed to carry his burden of proof with respect to this issue.

Reviewed by the Court.

Decision will be entered under Rule 50.

QUEALY, J., dissenting: In this case, the petitioner admittedly had an equity in the property which he was renting. He owned the property in fee and had merely granted to the trust a term of years, giving the trust no greater interest than that of a lessee. Section 162 (a) specifically limits the deduction for rentals to property "in which he [petitioner] has no equity." Regardless of what may have been the intention of the Congress, and I find it difficult to believe that there was any intent to legitimatize this form of transaction, I find no justification for disregarding the clear language of the statute. Accordingly, I believe that the position of the respondent on this issue should be sustained.

WILFORD E. THATCHER AND ESTELLA M. THATCHER, ET AL.,1 PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 5391-69-5393-69. Filed October 4, 1973.

A partnership, using the cash receipts and disbursements method of accounting, transferred all of its assets and liabilities, including accounts receivable and accounts payable, to a newly formed corporation in exchange for all of the authorized stock of the corporation. Held: Under sec. 357 (c), I.R.C. 1954, the excess of the liabilities assumed, including the accounts payable, by the corporation over the basis of the assets transferred is taxable. The basis of the stock acquired in the exchange is determined. Held, further, respondent's determination of reasonable compensation approved.

Leo S. Meysing, for the petitioners.

Gary R. DeFrang, for the respondent.

SIMPSON, Judge: In these consolidated cases, the respondent determined the following deficiencies in the petitioners' Federal income taxes:

Concessions having been made by the parties, the issues remaining for decision are: (1) Whether the liabilities transferred to a corporation as a part of an exchange under section 351 of the Internal

1 Cases of the following petitioners are consolidated herewith: Teeples & Thatcher Contractors, Inc., docket No. 5392-69; Karl D. Teeples and Iva A. Teeples, docket No. 5393-69.

Revenue Code of 19542 exceeded the basis of the assets acquired by such corporation in such exchange so that section 357 (c) is applicable; (2) what is the basis of the stock acquired by the transferor in such exchange; and (3) whether the respondent properly disallowed deductions to the corporation for salary payments made to Karl D. Teeples.

3 FINDINGS OF FACT

Wilford E. and Estella M. Thatcher are husband and wife who, at the time of filing the petition herein, resided in Portland, Oreg. They filed joint United States individual income tax returns for the taxable years 1963 and 1964, on the cash receipts and disbursements method of accounting, with the district director of internal revenue, Portland, Oreg.

Karl D. and Iva A. Teeples are husband and wife who, at the time of filing the petition herein, resided in Portland, Oreg. They filed a joint United States individual income tax return for the taxable year 1963, on the cash receipts and disbursements method of accounting, with the district director of internal revenue at Portland, Oreg.

Teeples & Thatcher Contractors, Inc., is an Oregon corporation having its principal place of business at the time of filing its petition herein at 8850 S.E. Otty Road, Portland, Oreg. Its United States corporation income tax returns for the period February 1, 1963, to December 31, 1963, and the taxable year 1964, prepared on the cash receipts and disbursements method of accounting, were filed with the district director of internal revenue at Portland, Oreg.

On March 31, 1956, Wilford E. Thatcher and Karl D. Teeples (hereinafter sometimes referred to as Thatcher and Teeples, respectively), formed a general partnership to engage in business as general contractors under the name of Teeples & Thatcher Co. (hereinafter sometimes referred to as the partnership). On August 1, 1960, the partnership purchased farm and cattle ranching properties.

From August 1, 1960, until February 1, 1963, the partnership owned and operated the contracting business and the farm and cattle ranching business. From February 1, 1963, until June 30, 1963, the partnership operated the farm and cattle ranching enterprise as its sole business activity. The partnership maintained its books and filed its partnership returns on the cash receipts and disbursements method of accounting.

In January 1963, Teeples & Thatcher Contractors, Inc. (hereinafter referred to as the corporation), was organized. On February 1, 1963,

All statutory references are to the Internal Revenue Code of 1954.

Since Judge Quealy conducted the trial and observed the witnesses, the Findings of Fact in this case are those made by him.

the partnership transferred to the corporation all of the assets and liabilities of the general contracting business in exchange for all 500 shares of the authorized stock of the corporation and the assumption by the corporation of the liabilities of the partnership.

The assets transferred to the corporation as of February 1, 1963, included the following:

The amounts of the liabilities assumed by the corporation as of February 1, 1963, included the following:

In addition, as part of the same transaction, the partnership transferred to the corporation unrealized receivables amounting to $317,146.96, consisting of partially completed construction contracts, and the corporation assumed accounts payable amounting to $164,065.54, consisting of costs incurred on account of said contracts. The unrealized receivables and accounts payable taken over by the corporation had not, prior to the date of transfer, been reflected in the computation of income and expenditures by the partnership for purposes of taxation.

After February 1, 1963, the corporation continued in business as general contractor and, in the course thereof, during 1963 paid all of the accounts payable assumed by it, and deducted said expenditures as business expenses on its United States corporation income tax return for the taxable period February 1, 1963, to December 31, 1963. Additionally, the corporation, in computing its taxable income for this period, reported as gross income all cash receipts thereafter collected by it, including all amounts collected in respect to the partnership unrealized receivables transferred to the corporation by the partnership.

In May 1963, the partnership distributed 300 shares of stock of the corporation to Teeples and distributed 200 shares of this stock to Thatcher. In August 1963, the corporation redeemed the 300 shares of the corporation stock owned by Teeples for $42,500. In June 1964, Thatcher sold 90 shares of stock of the corporation to Harry Pajutee for $22,500 and 20 shares of its stock to Lester Thatcher for $5,000.

The respondent has determined that Teeples and Thatcher, as partners, realized a taxable gain under section 351(a) and (b) and section 357 to the extent that the total liabilities assumed by the corporation exceeded the adjusted basis of the partnership in the assets or property transferred to the corporation. Consistent therewith, the respondent further determined that the stock of the corporation had a zero basis in the hands of the partners for the purpose of computing the gain realized by Teeples and Thatcher, respectively, on the subsequent redemption or sale of such stock.

Teeples was also manager of the partnership farm and cattle ranching business and devoted a substantial part of his time to this activity from the time the partnership acquired these properties until he sold his partnership interest to the Thatchers in June 1963. The farm and ranching business of the partnership was located approximately 350 miles from Portland, Oreg., and encompassed aproximately 1,400 acres. In March 1963, the corporation and Teeples entered into an agreement which provided that Teeples was to be employed by the corporation from March 1, 1963, until October 31, 1969, a period of 6 years and