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residence is located on the nursery property. During 1985
through 1987, petitioners owned and operated the nursery as a
sole proprietorship. During 1988 and 1989, Mr. Gandy owned and
operated the nursery as a sole proprietorship. Petitioners were
cash basis taxpayers.
During the years in issue, the nursery sold trees and plants
throughout the southwestern United States. The nursery grew
approximately 70 to 90 percent of its products. Some trees were
grown in the field and, when large enough for the customers'
needs, were dug up by hand, or, if very large, by machinery; the
dirt-covered roots of the tree then were covered with burlap and
wire mesh. This method of growing trees is known as ball and
burlap (B&B). The B&B trees generally were sold to landscapers
or construction companies.
During 1985, approximately 75 percent of the nursery's
production was in B&B trees; by 1989, 95 percent was in
“container” trees. In the container method, a tree is planted
and grown in the container in which it will be sold to its
ultimate purchaser. The nursery sold many of its container trees
to chain stores for resale. During the years in issue, Army-Air
Force, Wal-Mart, K-Mart, and Sears Roebuck & Co. were the major
clients of the nursery.
The nursery grew much of its stock from small seedlings.
The nursery had approximately 200 greenhouses and covered about
450 acres. The nursery would grow seedlings for a year in the
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