Lumber City Corporation, f.k.a. Neiman-Reed Lumber and Supply Company, Inc. - Page 7

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               During March 1985, Mr. Neiman contacted Mr. Ruf.  For                  
          approximately one year thereafter, they discussed on several                
          occasions the possibility of Mr. Ruf's becoming responsible for             
          the management of petitioner.  Both Mr. Neiman and Mr. Ruf                  
          understood that Mr. Ruf would be interested in assuming that                
          responsibility only if Mr. Ruf were given the option to purchase            
          100 percent of petitioner.  Acquiring such an option was Mr.                
          Ruf's most important consideration in determining whether to                
          agree to assume responsibility for the management of petitioner.            
               On April 1, 1986, petitioner entered into a management                 
          agreement (management agreement) with Mulholland Funding Corp.              
          (MFC), which was owned by Mr. Ruf and his wife.  Pursuant to the            
          management agreement, MFC agreed to provide petitioner with the             
          management services of Mr. Ruf for the period that began on April           
          1, 1986, and terminated on March 31, 1989.4  In return, petition-           
          er agreed to pay MFC fixed compensation of $8,000 per month plus            
          additional compensation in the nature of an "operations bonus" to           
          be determined at the end of each fiscal year for which the                  
          management agreement was in effect.  The operations bonus was to            
          be calculated at the end of each fiscal year based on the follow-           
          ing formula:  10 percent of the first $500,000 of petitioner's              

          4  The parties stipulated that Mr. Ruf became employed by peti-             
          tioner beginning in March 1986; however, the management agreement           
          provided that neither MFC nor Mr. Ruf was to be considered an               
          employee of petitioner.  We interpret the parties' stipulation to           
          mean that, pursuant to the management agreement, Mr. Ruf became             
          petitioner's CEO in March 1986.                                             



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