Andrew and Margita Zards et al. - Page 4

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          became shareholders of Good Shepherd on January 6, 1986.                    
          Petitioners Valdis and Vaida Vipulis are individuals who made a             
          joint return of income for 1985 and resided in Cold Springs, New            
          York, at the time their petition was filed.  Petitioner Valdis              
          Vipulis became a shareholder of Good Shepherd on December 8,                
          1985.                                                                       
               Good Shepherd is an Indiana corporation, incorporated on               
          December 30, 1985.                                                          
               All of petitioners, and Good Shepherd, are calendar year               
          taxpayers.  (We will use the term "shareholders" to refer to                
          those petitioners who were shareholders of Good Shepherd.)                  
          The Property, Ona Pranckeviciute, and Lithuanian Good Shepherd              
          Home                                                                        
               Central to our discussion is a parcel of real property                 
          located in Cedar Lake, Indiana (the property).  Sometime during             
          the summer of 1982, Ona Pranckeviciute (Ona) purchased the                  
          property from the Salesian Society, Inc. (Salesian).  In the                
          contract of sale between Ona and Salesian, the property is                  
          described as an approximately 86-acre tract containing the                  
          following improvements:  scholastic building, cafeteria,                    
          dormitories, gymnasium, chapel, and water plant.  Ona agreed to             
          pay $1 million for the property.  She paid $100,000 immediately,            
          and she agreed to pay the remaining $900,000 in installments,               
          without interest, her installment obligation (the Salesian                  
          obligation) being secured by a mortgage against the property (the           





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