Everett J. Diers - Page 3

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               Because of the advance payment of commissions and loans made           
          to petitioner, American regularly carried a debt on its books for           
          petitioner.  In 1994, when petitioner left employment with                  
          American, he had an obligation to repay American for commission             
          advances and loans.                                                         
               After petitioner resigned from American, he worked for                 
          Capitol American Group of Companies (Capitol) and Life USA                  
          Insurance Co. (Life USA).  During the year in issue, petitioner             
          received income of $175 and $797 from Capitol and Life USA,                 
          B.   Lawsuit and Settlement Agreement                                       
               In 1994, American sued petitioner in the 74th Judicial                 
          District Court of McLennan County, Texas, for allegedly taking              
          policyholders from American and for advances and loans American             
          had made to petitioner during his employment.  Petitioner                   
          threatened to countersue.                                                   
               On April 25, 1995, petitioner entered a settlement agreement           
          with American (settlement agreement).  The settlement agreement             
          provided that American would look exclusively to renewal                    
          commissions due or to become due to petitioner to satisfy the               
          outstanding loan balance.  In exchange, petitioner released all             
          claims and rights to renewal commissions attributable to past               
          services rendered for American that were due to petitioner or to            
          become due in the future.                                                   

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