Richard D. Hudson and Betty L. Hudson - Page 3

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          term "petitioner" to refer solely to Richard D. Hudson.                     
          Betty L. Hudson is a party mainly because she filed joint Federal           
          income tax returns with petitioner during the subject years.                
               The stipulated facts and exhibits are incorporated herein by           
          this reference.  Petitioner and Mrs. Hudson are husband and wife.           
          They resided in Bloomington, Indiana, when they petitioned the              
          Court.  They filed 1987 and 1988 Forms 1040, U.S. Individual                
          Income Tax Returns, using the status of "Married filing joint               
               During the subject years, petitioner operated a sole                   
          proprietorship that sold diamonds and other gemstones at                    
          wholesale and retail prices.  Petitioner started this business in           
          1965, and he has always used the cash receipts and disbursements            
          method (cash method).  Petitioner did not maintain inventories              
          for purposes of computing his cost of goods sold, but he                    
          currently expensed all costs that he paid to purchase the                   
          diamonds and other gemstones.  Following concessions by the                 
          parties, petitioner's gross receipts, cost of goods sold, and               
          gross profit percentage for the subject years were:                         

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