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On January 30, 1995, petitioner redeemed its stock owned by
Gertrude Klein for $468,528 and by Isidore Klein for $1,405,584,
for a total of $1,874,112. Petitioner paid Isidore Klein
$31,472, and gave him a $1,374,112 note bearing interest at 8
percent for the balance. Also on that day, petitioner issued 100
shares of its stock to Steven Klein for $1,376. Since then,
Steven Klein has owned all of petitioner’s stock. Petitioner’s
net worth declined from $2,001,654 in 1994 to $194,130 in 1995
after the redemption.
F. Petitioner’s Employees and Compensation Policies
1. Petitioner’s Employees
Petitioner had three employees during the 1950's: Isidore
Klein and two other people. By 1963, petitioner had nine
employees: Steven Klein and three others in the office, and five
employees in the factory. By 1993, 1994, and 1995 petitioner had
about 13 or 14 employees.
In 1994 and 1995, petitioner had four employees in the
office: Steven Klein, Jeffrey Schwaeber, Karin Paterson
(Paterson), and Karen Macken (Macken). Jeffrey Schwaeber has an
accounting degree and worked at his father’s accounting firm from
June 1981 to September 1991. His father is Richard Schwaeber,
who was petitioner’s accountant from 1972 through the years at
issue, except for a short time in the late 1970's. Jeffrey
Schwaeber worked for petitioner from 1991 to 1997. He was
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