Herman N. and Veronica Welter - Page 3

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                                  FINDINGS OF FACT                                    
               Some facts are stipulated and are so found.  The stipulation           
          of facts, with accompanying exhibits, is incorporated herein by             
          this reference.  At the time they filed the petition, petitioners           
          resided in Onslow, Iowa.                                                    
               For many years prior to the years at issue, petitioners                
          engaged in farming operations in Jones County, Iowa.  In 1993,              
          petitioners incorporated their farming operations by transferring           
          their farming equipment, grain, and livestock to two subchapter C           
          corporations:  Welter Seed & Honey Co. and Land of Milk & Honey             
          Farms, Inc. (the corporations).  Petitioners retained ownership             
          of their farmland and leased it to the corporations for use in              
          the corporations’ farming operations.  Petitioners also received            
          a modest salary from the corporations.                                      
               During the years at issue, each of the corporations                    
          maintained its own books and records, had its own bank account,             
          and filed Federal income tax returns.  One of the corporations,             
          Land of Milk & Honey Farms, Inc., is listed as the “producer”               
          and the “operator” on Government forms relating to Federal                  
          agricultural subsidy programs for each of those years.                      
               Prior to the incorporation of petitioners’ farming                     
          operations, petitioner Herman Welter (Mr. Welter) engaged in                
          commodities trading activities through several brokerage                    
          accounts.  Mr. Welter continued to engage in such activities                

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