Jerry S. Payne - Page 9




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          (2) petitioner would remain the primary lessee in respect of all            
          future leases of the premises for use by new corporations formed            
          by petitioner, (3) petitioner intended for 2618 to remain as his            
          sublessee until an SOB permit and “liquor license” (both of which           
          were then the subject of litigation) were acquired for the                  
          premises, and (4) at that time, petitioner would make JKP his               
          sublessee under a 10-year sublease.                                         
               JKP was incorporated in Texas on February 22, 1990.                    
          Petitioner was the sole shareholder of JKP.  The litigation                 
          against the city of Houston resulted in the issuance, on March              
          14, 1990, of an SOB permit to Virginia Sanders, who resided with            
          petitioner, was his legal assistant, and was president of JKP.              
          The permit was issued for use at the club’s premises, whereupon             
          petitioner applied for a mixed beverage permit on behalf of JKP.            
          Shortly after the issuance of such permit on or about November 1,           
          1990, operation of the club was transferred from 2618 to JKP,               
          which became the sublessee of the club’s premises from petitioner           
          pursuant to the February 20 agreement and lessee, from                      
          petitioner, of the tangible and intangible personal property                
          relating to the operation of the club that had been acquired by             
          petitioner from 2618 on February 15, 1988.  In January 1991, JKP            
          sold all of the assets needed to operate the club, including its            
          leasehold interest in the premises and in the other assets leased           
          from petitioner, for $1.1 million.                                          






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