Dennis C. Gandy - Page 5

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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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