Carl E. Jones and Elaine Y. Jones - Page 4

                  For convenience, we present a general background section and                        
            combine our findings of fact with our opinion under each separate                         
            issue heading.                                                                            
                                       General Background                                             
            A.  Petitioners                                                                           
                  Petitioners are married and filed joint Federal income tax                          
            returns (Form 1040) for 1989, 1990, and 1991 with the Internal                            
            Revenue Service Center in Atlanta.                                                        
                  During the years at issue, petitioner was a realtor, a real                         
            estate developer, and an investor in real estate.  He owned and                           
            operated several companies that built townhouses and expensive                            
            homes, and he engaged in other real estate development                                    
            activities.  Petitioner attended 2 years of law school but did                            
            not pass the bar exam.                                                                    
                  Mrs. Jones is a mother and a homemaker.  At the time of                             
            trial, petitioners had two children, a daughter and a son, 21                             
            years and 8 years of age, respectively.  During the years at                              
            issue, Mrs. Jones received $3,000 each month from petitioner                              
            which she used to pay for utilities and food.                                             
                  Mrs. Jones has long suffered from Raynaud's disease.  As a                          
            result of this disease, she had surgery on her feet in 1988 and                           
            again in 1991.  During the 1988 surgery, Mrs. Jones contracted a                          
            staph infection that complicated her medical condition and eluded                         
            detection until 1991.                                                                     
                  Petitioners separated temporarily in September of 1991 and                          
            reunited in May of the following year.  During the separation,                            

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