Patrick E. Catalano - Page 3

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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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