Estate of Robert G. Kluener, Deceased, Donald E. Hathaway, Co-executor and Charlotte J. Kluener - Page 15

            that APECO is the true seller, it would be charged with the gain                              
            realized on the sale of the horses, and no tax would be due                                   
            because APECO's substantial NOL carryforwards would offset that                               
            gain.  Moreover, because APECO had no current or accumulated                                  
            earnings and profits at the time the sales proceeds and the                                   
            earnings accumulated on them were distributed to Mr. Kluener, the                             
            distribution would be treated as a nontaxable return of capital                               
            and not as a taxable dividend.  If we decide that Mr. Kluener is                              
            the true seller, he would be charged with the gain on the sale of                             
            the horses, and an additional amount of income tax would be due                               
            from petitioners.                                                                             
                  Petitioners contend that, on or about August 1, 1989, Mr.                               
            Kluener transferred title to the horses to APECO in a transaction                             
            intended to meet the requirements of section 351(a).  Mr. Kluener                             
            did not negotiate or contract to sell the horses prior to the                                 
            transfer, but, subsequent to the transfer, the horses were sold                               
            at auction or otherwise disposed of.  The sales proceeds were                                 
            paid to APECO, which reported the sales for tax purposes.                                     
            Petitioners acknowledge that the form of the transaction was                                  
            designed to use APECO's NOL's to shelter the gain realized on the                             
            sale of the horses but argue that the transfer was for a                                      
            legitimate business purpose.  According to petitioners, the                                   
            purpose for the transfer of the horses was to provide APECO with                              
            a source of funds for the development of the Planatronic, and the                             
            horses were the only asset Mr. Kluener could contribute to APECO                              
            without diminishing his interest-paying capability to Fifth                                   

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