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backs) for that year was negative $3,599,000. In addition, at
the time that Mr. Ruf became petitioner's CEO, petitioner was
facing increased competition from the entry of large discount
home centers into its market. Despite that competition, under
Mr. Ruf's direction, petitioner achieved, according to its
financial statements, a positive net income after taxes (but
before utilization of net operating loss carryforwards/carry-
backs) for each of its fiscal years ended February 28, 1987,
through February 28, 1991.
After Mr. Ruf became petitioner's CEO in March 1986, he
undertook a number of initiatives in order to return petitioner
to profitability. Shortly after becoming petitioner's CEO, he
negotiated with petitioner's suppliers to extend petitioner's
credit even though petitioner had not been paying its bills.
Petitioner's suppliers extended petitioner's credit in part
because of Mr. Ruf's reputation in the industry for turning
around troubled home centers.
To improve employee morale, Mr. Ruf started having 7 a.m.
"donuts with Jess" meetings with petitioner's store employees.
As a result of his efforts, employee morale improved as evidenced
by fewer workmen's compensation claims and reduced inventory
shrinkage.
Within approximately three to six months after becoming
petitioner's CEO, Mr. Ruf reduced petitioner's office staff by
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