Michael L. and Susan Barnard - Page 3




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          General Motors (GM) Institute and received a degree in mechanical           
          engineering in 1966.  During the next 15 years, he worked as an             
          engineer for GM Corp.  He married Susan Barnard (Ms. Barnard) on            
          February 14, 1981.  Ms. Barnard is a registered nurse.                      
               Petitioners owned property in Charlevoix on which they                 
          constructed a facility that included a restaurant and bar                   
          (collectively, the restaurant) and a 12-room motel (motel).                 
          Petitioners began operating the restaurant and the motel in late            
          1982 as unincorporated businesses and incorporated those                    
          businesses in the middle of 1986 under the name Nanny's, Inc.               
          (Nanny's).1  For the remainder of 1986 throughout the end of                
          1988, Nanny’s operated as a C corporation that reported its                 
          income and expenses for Federal income tax purposes on the basis            
          of the calendar year.  Nanny's elected to be treated as an S                
          corporation effective with its taxable year beginning on January            
          1, 1989.                                                                    
               Ms. Barnard oversaw Nanny’s daily operation.  Nanny’s                  
          received most of its income in cash, and petitioners deposited              
          Nanny’s receipts into a cash register.  Each morning, Ms. Barnard           
          reconciled the cash in the register to the cash register tape of            
          Nanny’s business for the previous day.  Afterwards, petitioners             
          left some of the cash in the register for the current day's                 


               1 Petitioners’ basis in their Nanny’s stock was $10,000 upon           
          incorporation and at all relevant times thereafter (except to the           
          extent that their basis is reduced pursuant to this report).                





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