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FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are incorpo-
rated herein by this reference.
At the time the petition was filed, petitioners resided in
Fort Collins, Colorado. At all times relevant, petitioners used
the cash receipts and disbursements method of accounting.
Investment in Pizza Management, Inc.
In the 1960's and early 1970's, petitioner owned a number of
Pizza Hut, Inc. (Pizza Hut), restaurants as a sole proprietor
under a franchise arrangement between petitioner and Pizza Hut.
In 1975, petitioner was approached by several other individual
Pizza Hut franchisees who had formed a corporation called Pizza
Management, Inc. (PMI). Petitioner transferred his restaurants
to PMI in exchange for stock in the PMI corporation. Petitioner
believed that PMI had a special contractual right to issue its
shares to the public notwithstanding any terms or limitations of
the Pizza Hut franchise agreements. As a result of petitioner's
transferring his restaurants to PMI, petitioner received approxi-
mately 11 percent of the stock in PMI. By the mid-1980's, PMI
was the franchisee of approximately 200 Pizza Hut restaurants.
In the spring of 1986, PMI developed plans for a public
offering of PMI stock. Pizza Hut successfully prevented PMI from
issuing shares in PMI to the public. Pizza Hut asserted that a
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