Jerry S. Payne - Page 16

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          II.  Constructive Dividend Issue                                            
               Petitioner alleges that all of the WAs were authorizations             
          for Helmle to use the stated amounts, and no more than those                
          amounts, to tip the club’s dancers (as well as dancers at                   
          competing clubs) in order to assure that the club would be able             
          to retain a sufficient number of “quality dancers”.  Respondent             
          counters that petitioner has not furnished credible evidence that           
          the cash distributed by means of the WAs was used by petitioner             
          for any business purpose.                                                   
               Petitioner testified that he was advised by Helmle, who,               
          according to petitioner, effectively ran the club on a day-to-day           
          basis for petitioner during the audit years, that it was                    
          necessary to use club funds to tip the dancers and, in                      
          particular, the “quality dancers”.  According to petitioner, the            
          need to tip the dancers had become urgent in light of the pending           
          litigation over the club’s right to an SOB permit and the                   
          dancers’ concern that the club would go out of business if it               
          failed to secure the permit.  Petitioner testified that Helmle              
          would take money out of the cash register and use it to tip                 
          dancers, both at Caligula XXI and at competing clubs (apparently            
          to attract dancers at those other clubs to come work at Caligula            
          XXI).  Petitioner contends that the sole purpose of the WAs was             
          to restrict the amounts of cash that Helmle would be permitted to           
          use for that purpose.                                                       

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