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Petitioner, as an individual, owned three motorboats which
he leased to his corporation for various periods during the years
at issue pursuant to written lease agreements executed by
petitioner in his individual capacity as lessor and on behalf of
his corporation as lessee. From February 25, 1985, through
June 30, 1991, petitioner leased a 40-foot Mainship cabin cruiser
to the corporation. The Mainship had a galley and bedroom and
was equipped with a large television, a stereo, and a radio.
Petitioner berthed the Mainship in Sausalito, California (located
north of San Francisco in Marin County). From June 25, 1991
through 1992 petitioner leased to his corporation two Donzi
powerboats, which petitioner described as “pleasure boats”.
Petitioner berthed one of the Donzi powerboats in Sausalito and
the other in San Diego.
The boats were used mostly on weekends. Petitioner invited
clients of his legal practice and potential clients aboard his
boats. Business discussions took place on board. Occasionally,
the clients were accompanied by their spouses. Petitioner
watched television on the Mainship with his guests, and he used
the stereo whenever he was on board. He kept three sets of
binoculars on board which his guests could use. Occasionally, he
served food and beverages to his guests while they were on board.
After meeting on the boat, petitioner would take his clients or
other business contacts for a ride out on San Francisco Bay. He
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