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During the audit years, petitioner owned and operated, in
Houston, Texas, a law firm under the name of Payne & Associates.
Petitioner’s law practice primarily involved civil litigation.
Through Payne & Associates, petitioner was self-employed as a
lawyer and in real estate development. He reported his income
and expenses from those activities, on a cash basis, on Schedule
C attached to his individual returns. Petitioner was also a 50-
percent shareholder in Payne & Potter, Inc., a real estate
development corporation that was insolvent by the end of 1986.
Petitioner’s Involvement With and Acquisition of the Stock of
2618, Inc.
Prior to and during the audit years, 2618 owned and operated
a topless dance club in Houston, Texas, under the name of
Caligula XXI (the club). From 1986 through 1988, petitioner
represented 2618 and the club in litigation against the city of
Houston and others arising out of the city’s denial of the club’s
application for a permit to conduct a sexually oriented business
(the SOB permit), and against the Texas Alcoholic Beverage
Commission (TABC) for its refusal to renew the club’s mixed
beverage permit permitting the sale of alcohol to patrons.
Petitioner also provided legal representation to Gerhard Helmle
(Helmle), one of the two 50-percent shareholders of the stock of
2618, in criminal proceedings against Helmle for the possession
of illegal drugs. Prior to and during the audit years, Helmle
was involved in managing the operation of the club.
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