Epco, Inc. and Subsidiaries - Page 3

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            in aid of construction") and deposited this amount in an                                       
            interest-bearing checking account in the names of McArthy and                                  
            Imperial at Lemay Bank & Trust Co.  The account bore McArthy's                                 
            Social Security number as the taxpayer identification number, and                              
            interest earned on the account was paid to McArthy.  Funds could                               
            be withdrawn from the bank by checks signed by both Fribis, as                                 
            president of Imperial, and McArthy.                                                            
                  Imperial contracted with McClanahan Contracting                                          
            (McClanahan), a partnership of which Fribis was a partner, to                                  
            install the sewer main-line extension and expand Manor.  The cost                              
            of extending the main-line from Manor to Brookshire was $350,000.                              
            Imperial paid approximately $150,000 of this cost and the                                      
            remainder consisted of the $200,000 from the escrow account.  The                              
            expansion of Manor cost $190,000.                                                              
                  The escrowed funds were credited toward the $400 per pad                                 
            "contribution in aid of construction fee".  As such, Imperial did                              
            not charge McArthy a fee to connect each mobile home to the sewer                              
            system.  From the escrow account, $164,375 was disbursed in 1988                               
            and $35,625 was disbursed in 1989 to subcontractors and                                        
            contractors working on the construction of the sewer pipeline,                                 
            including Price Bros., Klueter Bros., McClanahan, and Fred Weber                               
            Inc.  Imperial now owns the sewer line extension.                                              
                  On its 1988 Federal income tax return, petitioner included                               
            in gross income the $164,375 disbursed from the escrow and                                     
            claimed depreciation in connection with those disbursements.                                   

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