Neal T. Baker Enterprises, Inc. - Page 13

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          Exchange Property.  The subdivision agreement for Tract No. 22332           
          was approved by the Beaumont City Council on February 13, 1990.             
               Around June/July 1989, Meadowlark Homes, a successor in                
          interest to Elkhorn, began to install the off-site improvements             
          for the Exchange Property.  Meadowlark Homes initially estimated            
          $480,000 ($10,000 per lot) as the cost for off-site improvements.           
               In a letter dated June 14, 1989, the Beaumont-Cherry Valley            
          Water District informed Meadowlark Homes of a proposed increase             
          in water connection fees, but gave Meadowlark Homes an                      
          opportunity to obtain the connections at the existing rate.  On             
          June 20, 1989, Meadowlark Homes purchased the water connections             
          at the existing lower rate.                                                 
               Around September/October 1989, Meadowlark Homes began                  
          construction of the 48 houses.  Meadowlark Homes first built 24             
          houses, which were sold for an average price of $140,000.  Next,            
          Meadowlark Homes built the second set of 24 houses, but sales of            
          these houses were slower then the first 24 due to a drop in the             
          market at the end of 1990.  Ultimately, Meadowlark Homes made a             
          profit of about $630,000 on the sale of the 48 homes.                       
          Tax Return and Accounting Information                                       
               Petitioner realized a $428,806 gain from the sale of the               
          Exchange Property.  This gain was reported on line 7 of Schedule            
          M-1 attached to petitioner's 1989 return.  Respondent in his                







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