Wayne Payne and Dorene J. Payne - Page 3

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                                  FINDINGS OF FACT                                    
               Some of the facts are stipulated.  The stipulation of facts,           
          the supplemental stipulation of facts, and the attached exhibits            
          are incorporated herein by this reference.  At the time the                 
          petition was filed, petitioners resided in Minneapolis,                     
               Petitioners operated HRDC as a partnership in 1993 and 1994,           
          and as a corporation subject to the provisions of subchapter S in           
          1995.  HRDC was in the business of roof repair for commercial               
          properties.  HRDC was owned during the years in issue as follows:           
                                      1993         1994         1995                 
          Wayne Payne (Mr. Payne)   50%           50.0658%      100%                  
          Mrs. Payne                50            49.9342        0                    
               HRDC operated from offices in a building owned by                      
          petitioners.  During the years in issue, Mr. Payne was                      
          responsible for HRDC’s roofing work, and Mrs. Payne worked in               
          HRDC’s offices.  Mrs. Payne and Cari Enerson (Ms. Enerson)                  
          maintained HRDC’s books and records.  Ms. Enerson was hired by              
          HRDC as its bookkeeper after her graduation from high school.               
          Before beginning her employment with HRDC, Ms. Enerson’s work               
          experience consisted of waitressing.                                        
               Before HRDC received a roofing job, Mr. Payne or one of                
          three employees of HRDC visited a potential customer’s site and             
          prepared a bid for roof repair work.  The bid was then sent to              
          the potential customer.  If the customer accepted the bid, he               

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