Compaq Computer Corporation and Subsidiaries - Page 3




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                                  FINDINGS OF FACT                                    
               Some of the facts have been stipulated, and the stipulated             
          facts are incorporated in our findings by this reference.  Since            
          1982, petitioner has been engaged in the business of designing,             
          manufacturing, and selling personal computers.  Details                     
          concerning petitioner's business operations are set forth in T.C.           
          Memo. 1999-220 and are not repeated here.                                   
               Petitioner occasionally invested in the stock of other                 
          computer companies.  In 1992, petitioner held stock in Conner               
          Peripherals, Inc. (Conner Peripherals), a publicly traded,                  
          nonaffiliated computer company.  Petitioner sold the Conner                 
          Peripherals stock in July 1992, recognizing a long-term capital             
          gain of $231,682,881.                                                       
               Twenty-First Securities Corporation (Twenty-First), an                 
          investment firm specializing in arbitrage transactions, learned             
          of petitioner's long-term capital gain from the sale of Conner              
          Peripherals, and on August 13, 1992, Steven F. Jacoby (Jacoby), a           
          broker and account executive with Twenty-First, mailed a letter             
          to petitioner soliciting petitioner's business.  The letter                 
          stated that Twenty-First "has uncovered a number of strategies              
          that take advantage of a capital gain", including a Dividend                
          Reinvestment Arbitrage Program (DRIP) and a "proprietary                    
          variation on the DRIP", the ADR arbitrage transaction (ADR                  
          transaction).                                                               





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