Gustafson's Dairy, Inc. - Page 6

          money for estate taxes and administration under section 3035 and            
          to keep control of the company in the Gustafson family.                     
               In 1984 and 1985, petitioner paid $1,702,000 to redeem stock           
          held by Noel Gustafson's estate.  Petitioner also redeemed Julia            
          Bagley's stock when she died in 1979.  During the years in issue,           
          petitioner expected that it would need about $1,700,000 to redeem           
          the stock of Pete Gustafson.  However, petitioner did not redeem            
          his stock when he died in 1995 because his estate did not need              
          money to pay estate taxes.  Petitioner plans to redeem Ellen                
          Gustafson Townsend's stock when she dies.  The redemption price             
          for her 350 shares will be $350,000.                                        
               5.   Repayment of Debt Owed to Shareholder                             
               During its 1988 fiscal year, petitioner repaid $2,586,750 in           
          debentures it owed to Pete Gustafson's trust and related interest           
          of $735,339 ($3,322,089 total).  Petitioner's tax attorney                  
          advised petitioner to retire the debentures.  Most of the                   
          debentures would have become payable in 20146 or when Pete                  
          Gustafson died, whichever occurred first.  Pete Gustafson was 84            
          years old in 1988 and not in good health.                                   

          5 Under sec. 303, a distribution of property to a                           
          shareholder to redeem the shareholder's stock to pay death taxes            
          is treated as a distribution in full payment in exchange for the            
          redeemed stock.                                                             
          6 One of the debentures would have matured in 2015, one in                  
          2016, and one in 2017.                                                      

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Last modified: May 25, 2011