Lucian T. Baldwin, III - Page 16

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          conduct any market studies.  The initial per-night rate of $70              
          per person purportedly covered lodging and meals and did not vary           
          by room.  Mr. Ketter increased the per-night rate to $125 per               
          person in August 1989, to $175 per person on January 1, 1991, and           
          to $200 per person on January 1, 1992.  Visitors to Granot Loma             
          enjoyed, for no additional charge, the Disney channel and other             
          entertainment channels, babysitters, shotgun shells, archery                
          targets and arrows, dry cleaning, and a variety of other items of           
          a personal nature.                                                          
               All of LFI’s purported rental income came from BCC and other           
          companies owned or controlled by petitioner.  The income,                   
          however, was insufficient to cover LFI’s alleged expenses.  LFI’s           
          cashflow deficits were funded through a shareholder’s loan                  
          account, thus ensuring that Granot Loma had adequate cashflow to            
          cover expenses.  BCC paid some of LFI’s invoices by intercompany            
          account transfers; others were paid by reducing LFI’s                       
          indebtedness to BCC.                                                        
               In the summer of 1990, petitioners held an auction to sell             
          off furniture and rugs at the lodge that had not been used in the           
          restoration.  The auction raised a total of $309,386.  The net              
          proceeds were applied to reduce LFI’s debt to BCC.8                         

               8In a stipulation of settled issues, the parties agreed that           
          petitioner had additional capital gains of $261,889 arising from            
          the auction sale and that the auction sale proceeds were not                
          ordinary income to LFI.                                                     

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