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:

Year
1964.
1965_-_.
1966

Total

Amount disallowed

$2, 468. 64

1,745. 73
877.43

5, 091. 80

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.

Again no substantially contemporaneous records were kept by peti

tioner.

On one occasion in 1966 petitioner had dinner with Mrs. C. C. Alexander and Colonel and Mrs. Charles A. Pheffer at the Sheraton Inn Petitioner had buried Mrs. Alexander's late husband and she now wanted the Pheffers to meet petitioner since they "were getting up in years." Petitioner paid for and deducted the entire cost of the dinner The Pheffers are still alive.

From time to time petitioners would entertain guests at their own home. One such event was petitioners' annual New Year's Day party. Between 150 and 200 friends and acquaintances annually attended this party. The primary purpose of the party was to watch the New Year's Day football games, and the secondary purpose was to promote goodwill for petitioner's business. Petitioners would rent two or three television sets and operate them simultaneously throughout their home during the party. Petitioners deducted some of the expenses of the 1966 party as business-related expenses.

Petitioner purchased a case of Tanqueray gin in January 1964. He gave away bottles of the gin in order to promote his business. He gave one bottle each to a Mr. Angle and a Mr. Stephenson, both of whom are personal friends. He has no record and cannot remember to whom he gave the other bottles. Petitioners deducted the entire cost of the case of gin as business gifts.

3. Legal Fees

In 1966 petitioners paid their attorney $750 for legal services rendered in connection with the establishment of the May 23, 1966, irrevocable trust for the benefit of their children, to which they transferred their reversionary interest in the funeral home property. In his statement, the attorney described the services rendered, without allocation, as "Research for, conferences concerning, and drafting of Irrevocable Family Trust Agreement." Petitioners deducted the $750 as a business expense on their 1966 income tax return. Respondent disallowed the deduction on the grounds the expense was personal in nature.

4. Worthless Note

On September 16, 1966, petitioner loaned Joseph Staley $2,500, and in exchange received Staley's $2,500 demand note bearing interest at 6 percent per annum. Petitioner did not ask Staley to repay the loan during 1966 because he did not believe Staley could pay it.

During 1966 Staley's assets consisted of his home and stock in a corporation. In 1967 the corporation purchased his stock for a note payable