Michael D. and Christine R. Alexander - Page 6

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          3.   The Dog-Breeding Business                                              
               In 1998, Mrs. Alexander also operated a beagle-breeding                
          business from petitioners’ home.  Petitioners’ three daughters              
          assisted Mrs. Alexander with this business throughout the year.             
          Petitioners’ daughters are Margot, who was 17 years old in 1998;            
          JCA, who was 9 years old; and JRA, who was 8 years old.4  The               
          daughters performed tasks such as cleaning the dogs and the yard            
          in which they exercised, putting up fencing, taking out the                 
          garbage, and caring for newborn puppies.                                    
               Petitioners credited each daughter with $4,250 of earnings,            
          for a combined total of $12,750.  In general, petitioners did not           
          pay their daughters in cash.  Instead, petitioners kept a running           
          total of their daughters’ earnings.  When a daughter wished to              
          make certain purchases, petitioners bought the goods or services            
          for the daughter and deducted the purchase price from the                   
          daughter’s running total.  If the balance of a daughter’s running           
          total was insufficient to make a purchase, the daughter was                 
          allowed to receive an advance or “go negative.”                             
               Petitioners did not require their daughters to pay for basic           
          goods such as food.  Their daughters were required, however, to             
          pay for nonessentials such as their share of family ski trips or            
          family trips to Disneyland.  The daughters also paid for items              
          such as books, room decorations, toys, movie rentals, and certain           

               4 The Court uses only the minor children’s initials.                   

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