Robert C. and Nancy L. Arnold - Page 3

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               Some of the facts have been stipulated and are so found.  The           
          stipulated facts are incorporated in our findings by this                    
          reference.                                                                   
                                   FINDINGS OF FACT                                    
               At the time petitioners filed their petition, they resided in           
          Delafield, Wisconsin.                                                        
          Background                                                                   
               From approximately 1956 until 1987, petitioner was a 50-                
          percent shareholder and vice president of ARCO Industries (ARCO),            
          a Wisconsin corporation that manufactured chemicals for the                  
          swimming pool industry.  Carl Ulrich, who served as president of             
          ARCO, owned the remaining 50-percent interest in ARCO.                       
               In 1987, petitioner and Mr. Ulrich sold their interests in              
          ARCO to Sowhite Chemical Corp. (Sowhite Chemical), another                   
          Wisconsin corporation in the same business as ARCO, and petitioner           
          then retired.  Sowhite Chemical agreed to pay the purchase price             
          for petitioner's and Mr. Ulrich's interests in ARCO through monthly          
          installments over an 11-year period.  The amount of petitioner's             
          monthly installment was approximately $7,488.  In October 1993,              
          Sowhite Chemical filed for bankruptcy protection and stopped making          
          payments to petitioner.                                                      
          IRA Distributions                                                            
               When petitioner sold ARCO, he rolled his qualified pension              
          plan into an individual retirement account (IRA).  In 1989,                  





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