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documents that petitioners had earlier presented. Petitioners'
counsel related the following information to respondent's counsel
during the meeting.
1. Petitioner is a chemical engineer whose specialty is
paint. In 1990 he was employed by Elite, a company that developed,
produced, and sold special application paints for bridges,
ironwork, and railroad rolling stock. Until 1987, Elite was a
wholly owned subsidiary of H. Enterprises.
2. Prior to 1987, petitioner had loaned funds or had not
received salary so that Elite essentially owed him $72,000. In
1987, Elite issued petitioner 49 percent of the outstanding stock.
In return, petitioner contributed $72,000 to Elite and signed an
interest-bearing note for $228,000. Petitioner expected to pay the
note with future Elite dividends. However, Elite did not pay
dividends because its excess cash was "siphoned off" by Mr. Hargis.
As a result of the transfer of stock in 1987, Elite was no longer
able to file a consolidated return and began to file its own income
tax returns.
3. Through two separate agreements entered into in April
1990, Elite canceled the $228,000 note, and petitioner acquired the
remaining outstanding shares of Elite stock. Central to the change
in ownership, but not part of the agreements, was a refinancing
arrangement whereby the financial backer of the corporation was
replaced.
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