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stipulations of fact, and attached exhibits are incorporated
herein by this reference.
At the time their petitions were filed, NITCO maintained its
principal office in Hebron, Indiana, and petitioners Robert G.
and Myrtis Mussman resided in Hebron, Indiana. Mr. and Mrs.
Mussman filed joint individual income tax returns for 1988 and
1989.
A. Background on NITCO and the Mussman Family
NITCO, an Indiana corporation, is an independent telephone
company that provides local wire-based telephone services in the
five following rural areas located in northwestern Indiana: (1)
Roselawn, (2) Mt. Ayr, (3) Demotte, (4) Lakes of the Four
Seasons, and (5) Hebron. It operates a local telephone company
office or exchange in each of these areas. In each of the years
1987, 1988, and 1989, NITCO had a total of 7,238, 8,099, and
8,634 access lines, respectively. Most of these access lines
were for residential customers. NITCO had relatively few
multiline business customers. As of 1989, NITCO had 16 multiline
business customers, none of whom had lines in excess of 10.
Since 1982, petitioner Robert G. Mussman (Mr. Mussman) has
been NITCO's president and chief executive officer. He has owned
approximately 95 percent of NITCO's outstanding shares of stock
since at least 1982. The balance of NITCO's outstanding shares
has been owned by Mr. Mussman's brother, Gerald Mussman. Since
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