Northwestern Indiana Telephone Company - Page 43

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                  From 1980 through 1989, NITCO maintained no written records                          
            documenting its specific future business needs and plans.                                  
                  From 1954 through 1994, NITCO did not declare and pay any                            
            formal dividends to its shareholders.                                                      

             L.  Examinations Conducted of Petitioners' Returns, Notices of                            
              Deficiency, NITCO's Petition, and Subsequent Formal Discovery                            
                        Conducted by Respondent in the Instant Cases                                   

                  On or about August 3, 1990, a revenue agent contacted and                            
            apprised Mr. Mussman and NITCO that the agent would be conducting                          
            an examination.  In an Information Document Request dated October                          
            31, 1990, to NITCO, the revenue agent, among other things, asked                           
            NITCO to elaborate with respect to its plans concerning the use                            
            of its accumulated earnings.  The agent's request, in pertinent                            
            part, stated:                                                                              

                  1. During my first visit, you enumerated the following                               
                  potential uses of the company's retained earnings:                                   
                  At the present time, the Company is involved in                                      
                  expansion:                                                                           
                  (1) The Company has a plan to introduce fiberoptics to                               
                  its system.  Engineering estimates have not been made                                
                  for the system.                                                                      
                  (2) The Company is developing a cellular telephone                                   
                  capability for the area.  This area is a RSA, Rural                                  
                  Statistical Area.  This development is being shared                                  
                  with two other companies, Monan and Pulaski-White.                                   
                  However, the family members, not the Company, made the                               
                  investment.                                                                          
                  (3) The Company would like to acquire the Monan                                      
                  telephone exchange.  There have been negotiations but                                
                  nothing has been put in writing about this.  The                                     
                  Company is closely held.  As a result, there are no                                  



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