                          T.C. Memo. 1996-95



                        UNITED STATES TAX COURT


         ON SHORE QUALITY CONTROL SPECIALIST, INC., Petitioner
            v. COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 7496-94.                  Filed March 4, 1996.


     Harry E. Caylor III (an officer), for petitioner.

     Joni D. Larson, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION

     POWELL, Special Trial Judge:     This case was assigned

pursuant to the provisions of section 7443A(b)(4) and Rules 180,

181, and 183.1

     Respondent determined deficiencies in petitioner's Federal

income taxes for the fiscal years ending August 31, 1991 and

     1
         All section references are to the Internal Revenue Code
in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                                 - 2 -


August 31, 1992, in the amounts of $2,717 and $3,120,

respectively.

     The sole issue is whether section 274(a)(1)(B) disallows

deductions for payments incurred in leasing property used for

hunting game.

                         FINDINGS OF FACT

     On Shore Quality Control Specialist, Inc. (petitioner or On

Shore) is an oil and gas pipeline inspection company.    Eddie H.

Hooks, Jr. (Mr. Hooks) was the president of On Shore during the

years at issue.   At the time of filing the petition, petitioner's

principal place of business was Austin, Texas.

     Robert C. Carr (Mr. Carr) leased a 1,700-acre ranch (the

ranch) from Texas A&M University located west of Austin, Texas,

in the so-called Hill Country.    Mr. Carr raised cattle on the

ranch.   The lease entitled Mr. Carr to sublet the ranch for

cattle grazing or hunting.    In 1979, petitioner, through its

agent, entered into an oral agreement (the hunting lease) with

Mr. Carr under which petitioner received the right to hunt on the

ranch.   The lease has been renewed yearly, or more precisely,

from hunting season to hunting season.    The property includes a

cabin that petitioner used.    Petitioner invited business

customers to go hunting on the property.
                                 - 3 -


         Mr. Carr did not lease the ranch to anyone other than

petitioner.2    However, under the understanding with petitioner,

while the record is somewhat unclear, some friends and business

acquaintances of Mr. Carr could also hunt on the ranch.3    Because

the hunting was on a working cattle ranch, Mr. Hooks notified Mr.

Carr prior to each hunt.     In addition, when friends of Mr. Carr

were hunting on the ranch, they were required to notify Mr.

Hooks, typically by stopping by the cabin prior to hunting.

Generally Mr. Hooks included them in his hunting plans.

     Petitioner was responsible for the cleaning and maintenance

of the property and the cabin.     The cabin was somewhat Spartan,

but petitioner installed a wood heating stove, refrigerator, and

microwave.     Frequently hunters spent the night in the cabin.

Petitioner also built and maintained hunting blinds or stands.

Generally, petitioner used the ranch on weekends during the

hunting season.     Mr. Hooks would go to the ranch on Wednesday,

clean the cabin and stands, and purchase the necessary food and

beverages.     The hunters would generally arrive on Friday and

leave on Sunday.




     2
        In the past, the ranch had been subject to poaching. Mr.
Carr felt, and history proved, that petitioner's presence on the
ranch deterred poachers.
     3
         While Mr. Hooks testified that people other than
petitioner's guests would "come in and hunt on occasion", he also
testified that he allowed them to hunt with petitioner's guests.
                               - 4 -


     During the 1991 and 1992 taxable years petitioner paid

$10,000 for the lease of the ranch.     Petitioner deducted, as

entertainment expenses, the $10,000 lease payment for each year

at issue.   In the notice of deficiency, respondent determined

that the lease payments were not deductible, pursuant to section

274(a)(1)(B), because they were made with respect to a facility.

                              OPINION

     Section 162(a) allows a deduction for all ordinary and

necessary expense incurred in carrying on a trade or business.

There is no dispute that petitioner's expenditure for the hunting

lease satisfies the requirements of section 162(a).     That,

however, does not end the matter.   Section 274(a)(1)(A) provides

that no deduction is allowable with respect to an activity of a

type generally considered to constitute entertainment "unless the

taxpayer establishes that the item was directly related to, or,

in the case of an item directly preceding or following a

substantial and bona fide business discussion * * *, that such

item was associated with, the active conduct of the taxpayer's

trade or business".   Section 274(a)(1)(B) is more draconian and

prohibits any deduction for any item "With respect to a facility

used in connection with an activity" which is of a type generally

considered to constitute entertainment, amusement, or recreation.

Thus, where (1) there is a facility, (2) the facility is used in

connection with an activity that constitutes entertainment, and
                                - 5 -


(3) there is an item (including an expenditure) with respect to

the facility, section 274(a)(1)(B) bars a deduction for that item

irrespective whether the requirements of section 274(a)(1)(A) are

satisfied.   Petitioner contends that the expenses for the hunting

lease constitutes an activity under section 274(a)(1)(A) and that

it satisfied the provisions of that subsection.   Respondent, on

the other hand, contends that the lease constitutes a facility

and the heavier gun of section 274(a)(1)(B) applies.

     The term "facility" is not defined in the statute; however,

the regulations provide that:

     Any item of personal or real property owned, rented, or
     used by a taxpayer shall * * * be considered to
     constitute a facility * * *. Examples of facilities
     which might be used for, or in connection with,
     entertainment include yachts, hunting lodges, fishing
     camps, swimming pools, tennis courts, bowling alleys,
     automobiles, airplanes, apartments, hotel suites, and
     homes in vacation resorts. [Sec. 1.274-2(e)(2)(i),
     Income Tax Regs.; emphasis added.]

     An objective test is used to determine whether an activity

constitutes entertainment,4 and if an activity is generally

considered to be entertainment, it will constitute entertainment

within the meaning of the statute, regardless of whether the

expenditure could be described otherwise.   Sec. 1.274-

2(b)(1)(ii), Income Tax Regs.   Operating costs, such as rent,

     4
         Under the regulations the term "entertainment" means
"any activity which is of a type generally considered to
constitute entertainment, amusement, or recreation, such as
entertaining * * * [inter alia] on hunting * * * trips". Sec.
1.274-2(b)(1)(i), Income Tax Regs.
                                - 6 -


constitute expenditures with respect to a facility.    Sec. 1.274-

2(e)(3), Income Tax Regs.

     Applying these principles to the facts here, the ranch for

which the expenditures were made clearly appears to be a

"facility".   It is an item of real property rented (or used) by

petitioner.   Sec. 1.274-2(e)(2), Income Tax Regs.   It was used by

petitioner for hunting.    Hunting generally constitutes

recreation.   See id.   The expenditure (rent) made by petitioner

each year to obtain the use of the ranch is an operating expense

and, therefore, constitutes an item with respect to the facility.

Sec. 1.274-2(e)(3), Income Tax Regs.     Accordingly, section

274(a)(1)(B) disallows the deduction taken each year for the rent

paid with respect to the hunting lease.

     Petitioner, however, argues that the ranch does not

constitute a "facility" because the hunting lease did not grant

petitioner the "exclusive use" of the ranch, citing our opinion

in Harrigan Lumber Co. v. Commissioner, 88 T.C. 1562 (1987),

affd. without published opinion 851 F.2d 362 (11th Cir. 1988).

In Harrigan the taxpayer leased property for hunting.      The lease

provided that the taxpayer's "officers, employees, and guests

* * * shall enjoy exclusive hunting rights," except that certain

members of the lessor's family were also entitled to hunt on the

ranch.   Id. at 1563.   The taxpayer argued that "hunting rights

* * * are intangible property rights and * * * do not constitute
                                    - 7 -


a 'facility' within the meaning of section 274(a)(1)(B)", but

rather should be considered to be an activity under section

274(a)(1)(A).       Id. at 1564.   We recognized that to a certain

degree the distinctions between a facility and an activity were

sometimes difficult to draw.       Nonetheless we reasoned that

        petitioner has exclusive right to use the hunting area
        for hunting, fishing, and other recreation.
        Petitioner's exclusive lease of the hunting rights
        grants to petitioner, on prior notice, unfettered
        access to the hunting area * * *. The hunting area is
        where the recreation takes place. During petitioner's
        recreation in the hunting area, petitioner has
        exclusive occupancy of the hunting area. Therefore,
        the hunting area is a facility used in connection with
        entertainment * * * [Id. at 1566; fn. ref. omitted.]

        Petitioner misconceives the parameters of the exclusive use

discussion in Harrigan.       The exclusivity language refers to the

right of the lessee to bar the general public, and not a limited

number of persons covered by a lease, from participating in the

recreation.       Indeed, in Harrigan the lease provided that members

of the lessor's family could hunt the property.       This is also

apparent from the example in the legislative history, referred to

in Harrigan, in which a deduction is allowed for an expenditure

for 1 day at a commercial shooting preserve that is opened to the

public.       See H. Conf. Rept. 95-1800 (1978), 1978-3 C.B. (Vol. 1)

585.5       In that example the taxpayer had no control over the use

        5
        H. Conf. Rept. 95-1800, at 251 (1978), 1978-3 C.B. (Vol.
1) 521, 585, states:

                                                         (continued...)
                                 - 8 -


of the property.   "Where the taxpayer is, however, granted

exclusive use of and unfettered access to the property the

character of the expenditure changes."        Harrigan Lumber Co. v.

Commissioner, supra at 1567.

     The precise line between exclusive and nonexclusive use may

be difficult to draw.   However, where the taxpayer, as here and

in Harrigan, dominates the use of the hunting rights, we have no

difficulty in finding that in substance the taxpayer enjoys the

exclusive rights under the lease.    Accordingly, the hunting lease

here in question falls within the definition of a "facility" in

the statute and regulations.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.




     5
      (...continued)
     For example, if a salesman took a customer hunting for
     a day at a commercial shooting preserve, the expenses
     of the hunt * * * would be deductible provided that the
     current law requirements of substantiation * * * are
     met. However, if the hunters stayed overnight at a
     hunting lodge on the shooting preserve, the cost
     attributable to the lodging would be nondeductible
     * * *
