PMT, INC. - Page 7

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          quality to the cotton fabric, which cotton did not have                     
          naturally.  Mr. Penalba developed the cotton/Lycra fabric by                
          wrapping the synthetic filament completely around the cotton                
          fibers.  The cotton/Lycra fabric was used by clothing                       
          manufacturers for such products as athletic jerseys, leotards,              
          dresses, bicycling shorts, ski shorts, and leggings.  Sales for             
          the cotton/Lycra fabric caused petitioner's gross receipts for              
          its fiscal year 1990 to increase dramatically.                              
               The cause of petitioner's decrease in sales after 1990 was             
          primarily market conditions.  After its fiscal year 1990, other             
          operators became able to manufacture fabrics similar to the                 
          cotton/Lycra fabric, causing increased competition for petitioner           
          in this product.                                                            
               On its Federal income tax returns for its years ending July            
          31, 1987 through July 31, 1990, petitioner reported the following           
          gross receipts:                                                             
                    Year ending July 31           Gross receipts                      
                         1987                     $9,244,122                          
                         1988                     7,764,587                           
                         1989                     11,514,777                          
                         1990                     22,203,363                          

               On its Federal income tax returns for its years ending July            
          31, 1987 through July 31, 1990, petitioner reported the following           
          taxable income:                                                             








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