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On October 16, 1986, in partial payment of the $232,511
purchase price for the shares of stock of UI, petitioner paid
Wilcox $125,000 from the family trust account. Eventually, on
April 28, 1989, petitioner’s obligation to pay Wilcox the
$107,511 balance due on the purchase of the stock of UI was
satisfied by petitioner’s transfer to Wilcox of 10,000 shares of
stock in a newly formed corporation that petitioner formed as a
subsidiary of UI.
After petitioner’s purchase of the stock of UI and during
the years in issue, UI operated as a developer and seller of
computer software and hardware. UI generally sold its computer
products to local governments, insurance companies, and
bookstores.
Petitioner served as UI’s president, and Suzanne B. Goodrich
served as UI’s secretary. Wilcox continued as a director of UI.
On October 14, 1986, 1 day after petitioner agreed to the
purchase of the stock of UI, petitioners transferred $155,475
from the family trust account to UI (1986 transfer). UI used the
$155,475 transferred by petitioners to pay salaries of several UI
employees and to pay for development of new computer software
products.
On March 3 and April 1, 1987, petitioners made additional
transfers of $18,000 and $24,000, respectively, from the family
trust account to UI (1987 transfers). UI used this total of
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