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Groths decided to enter the winery business. Accordingly, during
that year, they established, pursuant to California law, Groth
Vineyards and Winery (Winery), an S corporation. Winery is
engaged in the business of making and marketing wines, such as
cabernet sauvignon, chardonnay, and sauvignon blanc, which are
named for the varietal or type of grape from which each is made.
Since it started business, Winery has used the accrual method of
accounting.
Initially, the Groths owned all of the outstanding shares of
Winery's stock. In 1982, the Groths employed a professional
winemaker, Nils Venge, as general manager of Winery. During
1990, Mr. Venge was responsible for all production operations of
Winery and for supervision of Vineyards' vineyard manager.1 Mr.
Venge's employment contract provided for options to acquire up to
10 percent of Winery's stock, which he exercised as they became
available. During each of the following years, Mr. Venge held
the following percentage of Winery's stock:
Year Percentage
1985 1.07
1986 2.71
1987 6.28
1988 8.85
1989 10.00
1990 10.00
1 In general, a winemaker decides when to pick grapes and must
be satisfied with the viticultural practices of the vineyard
supplying grapes.
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