D. Sam Scheele - Page 3

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               In November and December 1989, petitioner received from one            
          Lee Weisel (Weisel) payments totaling $279,219 (the Weisel                  
          payment).  Petitioner did not include the Weisel payment as an              
          item of gross income in his 1989 Federal income tax return.                 
          Petitioner’s omission of the Weisel payment from gross income is            
          the principal basis for respondent’s determination of a                     
          deficiency.  To understand petitioner’s reason for not reporting            
          the Weisel payment as an item of gross income, it is necessary to           
          understand something of petitioner’s business dealings during the           
          years prior to the payment.                                                 
          Biomass One L.P.                                                            
               Biomass One L.P. (Biomass) is a Delaware limited partnership           
          formed in 1984 to own and operate a woodwaste-fired, thermal                
          electric power and steam generating facility, which was to be               
          constructed in White City, Oregon (the cogeneration facility).              
               Biomass Operating Co., Inc. (Biomass Operating), is an                 
          Oregon corporation.  Petitioner and Weisel are two of three                 
          shareholders of Biomass Operating.  At various times between                
          December 31, 1984, and January 12, 1989, petitioner, Weisel, and            
          Biomass Operating were, alone or together, managing general                 
          partners of Biomass.                                                        
               Sometime in March 1984, Biomass entered into a contract for            
          the design and construction of the cogeneration facility (the               

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