*209 Decision will be entered for the respondent.
Expenses relating to ownership and operation of a yacht held not deductible from gross income as ordinary and necessary business expenses. Sec. 23(a), I.R.C. 1939.
*838 Respondent determined a deficiency in income tax of petitioners for the year 1953 in the amount of $ 34,603.56. The principal issue is whether expenditures relating to the operation of the yacht Goodwill in 1953 are deductible as ordinary and necessary business expenses.
FINDINGS OF FACT.
Some of the facts have been stipulated, and as stipulated, are incorporated herein by reference.
Petitioners, husband and wife, are residents of Newport Beach, California. They filed a joint income tax return for 1953 with the director of internal revenue at Los Angeles, California. Ralph E. Larrabee will hereinafter be referred to as the petitioner.
Petitioner is the owner and operator of a contract machine shop business conducted under the name of L. & F. Machine Co., at Huntington Park, near the city of Los Angeles, *210 which has been in operation since 1935. Its books are kept on an accrual basis.
*839 There are approximately 75 to 100 machine shops in the Los Angeles area which are competitors of the L. & F. Machine Co. During 1953 it employed no solicitors or salesmen and paid no commissions for any work done in its shop; such practice is not unusual in the contract machine shop business. From its inception petitioner has practiced economy in its operations by acting as its "sales force," carrying no fire or accident insurance and only required workmen's compensation insurance, and doing no advertising. The savings which resulted have been passed on to its customers in the form of lower prices for work performed. It enjoyed a reputation for doing efficient work. During 1953 it had about 50 to 75 customers a month and carried approximately 250 customers on its books.
The total sales of the L. & F. Machine Co. for the years 1942 through 1954 were as follows:
| 1942 | $ 1,215,278.24 |
| 1943 | 1,134,360.65 |
| 1944 | 824,116.89 |
| 1945 | 629,871.63 |
| 1946 | 629,887.77 |
| 1947 | 574,062.11 |
| 1948 | 704,755.76 |
| 1949 | 643,935.24 |
| 1950 | 573,652.80 |
| 1951 | 1,112,626.95 |
| 1952 | 1,205,088.01 |
| 1953 | 1,009,014.31 |
| 1954 | 950,807.10 |
*211 In 1941 petitioners purchased their home at Newport Beach and at the same time acquired a 42-foot power boat, the Omega, which was kept in a slip in front of the house. Sometime thereafter he also acquired a 14-foot sailboat. He enjoyed boats, and was active as a fisherman. During the years 1942, 1943, and 1944 he was a member of three fishing clubs, and in 1950 was a member of the Long Beach Fishermen's Club. He terminated his membership in the latter club because, as a "skipper of a boat," he was not entitled to "compete in their trophies." His activities and interest in fishing persisted, however, and in 1952, through the Balboa Angling Club, he attempted to gain international recognition by submitting a claim for a world's record bramble shark caught while on a fishing trip to the Guadalupe Islands aboard the Goodwill, a yacht hereinafter described. In 1953 he was a member of the Newport Beach Yacht Club. During the taxable year, as well as prior and subsequent thereto, petitioner was a yachtsman and sportsman of renown.
In 1951 petitioner acquired a 161-foot auxiliary-powered sailing yacht, known as the Goodwill. He sold the Omega shortly thereafter. The*212 Goodwill has a displacement of approximately 300 tons; it normally carries a crew of 3 and furnishes accommodations for 18 people. When racing it has carried a crew of 45, and at the time of the trial it was preparing for a race with a crew of 51. *840 It has a steel hull and was built by the Bethlehem Shipbuilding Company in New York, at a purported construction cost of about $ 750,000. Petitioner kept a large scrapbook with the word Goodwill imprinted in gold on the front cover; it contains numerous newspaper and magazine clippings and other materials relating to the yacht and the sports and social activities revolving about it. Some of the clippings refer to the yacht's luxurious appointments. The L. & F. Machine Co. is mentioned incidentally in some (about 5 per cent) of the clippings. Petitioner was proud of his ownership of the Goodwill. His asking price for the vessel in 1959 would be $ 250,000.
On all trips made by the Goodwill, petitioner was the skipper and master of the vessel; it never moved unless he was aboard. It was his custom each year in the fall or winter to sail it to Mexican waters where it was maintained for approximately 4 or 5 months. *213 His wife sometimes accompanied him on these trips. After reaching his destination, e.g., Acapulco, petitioner would fly to the United States to supervise the L. & F. Machine Co., leaving the boat for the enjoyment of his guests. Petitioner would subsequently fly back to the boat to return it to the United States. On the return trip his wife would leave at Mazatlan and complete the trip by airplane. In the summertime the Goodwill was kept at the Orange County Dock in Newport Beach, California.
During 1953 the Goodwill was in Mexican waters from January 5 to February 9. It was returned to the United States in February and from the middle of that month until the early part of July petitioner was engaged in getting it ready for the Newport-Honolulu Yacht Race, which started on July 4 and in training a crew to sail it in that race. It competed in the race under the flag of the Newport Yacht Club, carrying a crew of 45 persons including petitioner, his brother Al Larrabee, who acted as photographer, and 5 paid Mexican hands; the remaining members of the crew were volunteer unpaid hands, known as "Corinthians," who participated in the race for their enjoyment. It was the *214 first yacht to cross the "finish line." It returned to Newport on July 27. It then made a trip to Ensenada, Mexico, where the Mexican members of its crew were discharged, and returned to Newport. On September 11 it was bareboat chartered for a week's trip to Guadalupe and return. On December 30 it left for Mexican waters. Petitioner did not keep a complete guest list of persons who were on board the Goodwill during 1953.
A sound film in color, 1,150 feet long, was taken portraying the Goodwill undergoing preparation for, and its participation in, the 1953 Newport-Honolulu race. It has been shown to many organizations, including yacht clubs, Rotary, Kiwanis, and Lions Clubs, Sea *841 Scouts, and Girl Mariners. The running of the film takes about 25 minutes. The L. & F. Machine Co. is mentioned but once during the entire showing of the film.
As of December 31, 1952, the Goodwill had an unadjusted cost basis of $ 64,223.19. On or about May 1, 1953, capital expenditures in the amount of $ 13,941.50 were made for winches and sails. Its unadjusted value on the books of petitioners as of December 31, 1953, was $ 78,164.69. For depreciation purposes petitioners used*215 a 10-year life for the Goodwill, a 10-year life for the winches acquired in 1953, and a 5-year life for the sails acquired in 1953, with no allowance being made for salvage value of the boat, sails, or winches.
In their 1953 income tax return petitioners deducted $ 33,973.62 as business promotion expenses of the L. & F. Machine Co. Of this amount, $ 31,068.96 represents the net cost of operating the Goodwill. Petitioners also deducted depreciation on the Goodwill in the amount of $ 7,289.44, of which $ 6,360 was on the yacht, $ 209.44 on the sails, and $ 720 on the winches. In determining the deficiency, respondent disallowed the claimed deductions for operating costs and depreciation aggregating $ 38,358.40.
The Goodwill was not used during the year 1953 for the purpose of carrying on or promoting the business of the L. & F. Machine Co. The costs of owning and operating this yacht during that year did not constitute "ordinary and necessary" business expenses.
OPINION.
Petitioners contend that the cost of owning and operating the Goodwill during the year 1953 should be allowed as ordinary and necessary business expense incurred in carrying on the business of*216 the L. & F. Machine Co., a business which was owned and operated by petitioner as sole proprietor. They urge that the Goodwill was used primarily for entertainment of business friends, potential customers, and others primarily for business reasons and with a view to profit, and that as a result the business of the L. & F. Machine Co. was increased during the year 1953. We do not agree.
The burden of proof was upon petitioners, and we do not believe on the evidence they have produced that the expenditures herein were incurred for business rather than personal reasons, or that there was any proximate relationship between the operation of the yacht and the L. & F. Machine Co. Without doubt, the Goodwill is a magnificent vessel, and petitioner obviously takes great pride in her. He testified: "When we were laying in Acapulco, even the President of Mexico's yacht took second place to her as far as beauty was concerned." Petitioner is a sportsman and yachtsman of renown. His interest in fishing appears on this record to *842 be more than casual, and the scrapbook in evidence shows the part played by the Goodwill in such activities. But even the fishing exploits were*217 secondary to the Honolulu race, which dominated petitioner's activities in 1953 with respect to the yacht. Preparation for the race alone took some 4 months; the race itself lasted approximately 11 days, followed by a period of celebration, social activities, and return to Newport. The publicity relating to the race was considerable; but the newspaper articles were of the sort that would be of interest primarily to readers of the sports or social columns. The L. & F. Machine Co. was scarcely mentioned. And the film, upon which petitioner lays such stress, makes but a passing reference to the L. & F. Machine Co. We cannot seriously accept his contention that since the L. & F. Machine Co. was wholly owned by him, his publicity must be attributed to the business. The focus of the publicity was upon petitioner as a sportsman. We are not convinced that there was any substantial connection between the Goodwill and petitioner's business. In , affirmed (C.A. 5), we said (at 471):
Nor does the evidence show whether there was any proximate relationship between the expenditures*218 and the alleged business. Certainly, the word "entertainment" is not a magic formula entitling one to deduction without inquiry as to whether the entertainment in question really had a significant bearing upon the conduct of the alleged business. The situation is one that is susceptible of gross abuse, and it is not too much to ask that one claiming such deductions show that the expenditures in question were genuinely related to the conduct of a business. We cannot say on the record before us that any of the claimed expenditures could qualify for deduction; accordingly, there is no occasion to make an approximation such as was indicated in (C.A. 2). * * *
The situation here, even more than in the Walet case, is one that is susceptible of gross abuse. We view with skepticism, on this record, petitioner's testimony that the yacht was "put * * * in operation of entertaining my customers and potential people I thought would be influential in getting me acquainted with other people who had business * * *." His vague and general testimony that the business benefited from the operation of the yacht is far from*219 the kind of evidence that is necessary to show a proximate relationship between the expenditures for the Goodwill and the business. Although there was an incomplete list of guests who were on board the yacht in 1953, very few of them appear on this record to have been connected in any way with customers of the L. & F. Machine Co. One name, that of Donald Douglas, Jr., associated in some undisclosed manner with the Douglas Aircraft Company, does appear prominently. He seems to have been an important member of the crew in the 1953 race to Honolulu, and petitioner *843 had designated him as sailing master for the 1959 race to Honolulu which was to begin on July 4, shortly after the trial herein. But there is no showing that Donald Douglas, Jr.'s activities in relation to the Goodwill reflected anything more than a mutual interest in sailing or racing. There is not even a suggestion that any business which the L. & F. Machine Co. might have obtained from the Douglas Aircraft Company was attributable, even in part, to the Goodwill.
No doubt petitioner's social and sporting activities revolving around the Goodwill may have cemented some friendships that might have*220 resulted in some indirect benefits to his business. Such could be true of any social relationships. But the internal revenue laws allow as deductions only the "ordinary and necessary" expenses in connection with the conduct of a business, and, to be deductible, such expenses must be proximately related to such business. It is not enough that there may be some remote or incidental connection. To repeat, the burden of proof is upon the petitioner, and we cannot find on this record that the ownership and operation of the yacht Goodwill were sufficiently connected with petitioner's business to justify the classification of the controverted expenditures in whole, or in any part, as business expenses. Although the sales of the L. & F. Machine Co. increased sharply in 1951 and remained at approximately the same level for several years, it does not appear that such increase was attributable in any way to the Goodwill rather than to the effect of the Korean war.
After a careful consideration of all of the evidence, we have concluded and found as a fact that the Goodwill was not used during the year 1953 for the purpose of carrying on or promoting the business of the L. & F. *221 Machine Co. We hold therefore that none of the costs of operating the Goodwill during that year qualifies as an ordinary and necessary business expense and that petitioners are not entitled to the deductions claimed for those costs and for depreciation on the yacht, winches, and sails.
Decision will be entered for the respondent.