Charles E. and Jacquelyn Yates - Page 3

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          account and treated as dividends from Adena, reducing his basis             
          in Adena’s stock.  Mr. Adams knew about and acquiesced to                   
          petitioners’ practice of paying personal expenses with funds from           
          the Adena account.                                                          
               Mr. Yates personally guaranteed a large amount of debt                 
          relating to the mining companies (mining debt) and was concerned            
          about the likelihood of personal injury lawsuits relating to                
          employees of such companies.  In an attempt to protect some of              
          his assets from these risks, and to provide a mechanism to                  
          accumulate assets for retirement, on December 16, 1992, Mr. Yates           
          incorporated Fox Trot as an S corporation.  Through Fox Trot                
          petitioners purchased, improved, and operated a Kentucky farm.              
          Mr. Yates kept Fox Trot’s assets and liabilities separate from              
          those of the mining companies.                                              
               From January 1, 1993, until September 1, 1994, Mr. Yates was           
          the sole shareholder of Fox Trot.  On September 1, 1994, to                 
          further separate Fox Trot’s assets from the mining companies’               
          risk, Mr. Yates gave all of Fox Trot’s stock to Mrs. Yates, who             
          was the sole shareholder of Fox Trot from September 1, 1994,                
          through 1996.                                                               
               During the years in issue, Fox Trot experienced substantial            
          losses.  Mr. Yates used funds from Adena to finance Fox Trot.               

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