Midwest Stainless, Inc. and Robert A. and Mary J. Lechner - Page 4

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                  Mr. Lechner filed an individual income tax return for 1993,                          
            and Stainless filed a corporation income tax return for the                                
            fiscal year ended September 30, 1993.  Attached to each of those                           
            returns was a statement regarding the organization of Stainless                            
            in a section 351 exchange.  This statement recited that all                                
            assets of the sole proprietorship, including “cash accounts and                            
            other receivables”, were transferred to Stainless in exchange for                          
            its common stock, but that the “only liability assumed was                                 
            withheld payroll taxes”.                                                                   
                  The sole proprietorship and Stainless during the taxable                             
            years in issue used the cash method of accounting for income tax                           
            purposes without objection from respondent.                                                
                  Mr. Lechner incurred $239,594.68 of debt to Stainless by                             
            depositing in his personal bank account gross receipts of                                  
            Stainless attributable to payments, after May 31, 1993, for jobs                           
            in progress of the sole proprietorship.  On June 30, 1993,                                 
            Stainless accounted for the deposit by making a journal entry                              
            (designated “Receivable from Officer”) in its accounting records                           
            showing that Mr. Lechner owed Stainless the amount deposited in                            
            his personal account.  No promissory notes were ever made                                  
            representing this debt, and no interest was charged on this debt.                          
            After June 1, 1993, Mr. Lechner also made payments with funds                              
            from his personal bank account of expenses related to the jobs in                          
            progress, and those payments reduced his outstanding debt to                               

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