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company for Weeden Capital Partners, a venture investment
partnership. Initially, Mr. Whelpley was retained to
advise Weeden about product development by Avant-Garde
Computing, Inc. (Avant-Garde), a publicly traded computer
company in which Weeden owned a 15-percent capital stock
interest.
On January 2, 1987, Mr. Whelpley founded Whelpley
Associates, Inc. (WAI) as a vehicle for providing his
consulting services. During each of the years in issue,
Mrs. Whelpley and Mr. Whelpley, Jr., owned 87.5 and 12.5
percent of the outstanding stock of WAI, respectively.
Mr. Whelpley served as an officer and employee of WAI but
did not own any WAI stock during any of the years in issue.
WAI elected to be an S corporation, pursuant to section
1362(a), and it filed a Form 1120S, U.S. Income Tax Return
for an S corporation, for each year of its existence. WAI
used the accrual method of accounting in 1987 and 1988, and
a hybrid method in 1989.
At the time Mr. Whelpley began consulting for Weeden,
both he and Weeden believed that Avant-Garde needed a new
generation of computer processor to support its products.
Mr. Whelpley and Weeden agreed to form Communications
Processors, Inc. (CPI), for the purpose of developing the
processor with capital supplied by Weeden and expertise
supplied by Mr. Whelpley. This processor was to be
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