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the corporation agreed that the corporation would redeem petitioner's 50 shares of stock therein for $125,000. The $125,000 was to be paid $25,000 down; the balance of $100,000 was payable over 7 years in equal, semiannual installments due on the first day of May and December of each year, commencing on May 1, 1975, with interest at an annual rate of 6% percent.

Petitioner and his son intended that the execution of the redemption agreement finalize their arrangement regarding the ownership of the corporation. It did not. Petitioner did not receive the $25,000 downpayment required 10 by the redemption agreement on the date it was signed. Petitioner's son did not bring to the November 7th meeting at Kelley's office a corporate check or any other means by which the corporation could pay petitioner the downpayment. Nevertheless, petitioner and his son (on the corporation's behalf) signed the redemption agreement on November 7, 1974. They agreed to handle the downpayment at the corporation's office.

Even after signing the redemption agreement, petitioner and his son continued to argue over its terms.11 Thereafter, they had several meetings in which they tried to resolve their differences. At one such meeting on December 27, 1974, petitioner's son brought a corporate check in the amount of $25,000, which was dated that date, in hopes of completing the redemption. However, petitioner and his son started arguing again and did not consummate the redemp

The record does not establish when the above language in regard to the cash in the savings account was stricken out.

10 The redemption agreement clearly contemplated the payment of a $25,000 downpayment at the time the redemption agreement was executed. It provided that the consideration for petitioner's stock would be: "The total sum of $125,000.00, payable as follows: $25,000.00 down, receipt of which is hereby acknowledged." (Emphasis added.)

It is noted that the total purchase price represented $2,500 per share for petitioner's 50 shares. The $25,000 downpayment would have covered the 10 shares to be sold as of October 1, 1974, according to the terms of the redemption agreement.

11The subject of these arguments is not wholly clear. Kelley testified that he thought they mostly had to do with Mick's desire to get petitioner off the business' premises. However, it was apparent to the Court that Kelley had little or no personal knowledge as to what was going on between Mike and Mick at that time. For example, Kelley testified that it was his understanding that petitioner and Mick were living in the upstairs apartment during the negotiations. That was not the fact. Mick never lived in that apartment and Mike did not live there during the years before the Court. Eunice Postma lived in the apartment during the time period in which the gambling raids that precipitated the redemption took place. Kelley could not recall if these arguments concerned the language that was stricken from the redemption agreement. See note 9 supra.

tion. Finally, on January 16, 1975, the redemption was finalized. Mick gave petitioner the corporation's $25,000 check dated December 27, 1974, and a promissory note12 in the amount of $100,000, which represented the balance of the purchase price. In return, petitioner delivered the stock certificate representing his stock in the corporation to Kelley. He also executed a document directing Kelley to deliver the stock certificate to the corporation on May 1, 1975, upon payment of the first installment due under the promissory note on that date.13

Although the record does not show exactly when, on or about January 16, 1975, petitioner resigned from his positions as president and director of the corporation. He also relinquished his managerial and check-signing authority. Petitioner's son became the corporation's president. Nancy J. Cerone (Nancy Cerone), then Mick's wife,14 became the corporation's secretary and treasurer. She also became a director of the corporation.

Petitioner's managerial responsibilities were assumed by Nancy Cerone and Eunice Marty Postma (Eunice Postma). Nancy Cerone had been employed by the corporation since her marriage to petitioner's son in 1967. She had worked full time for the corporation during the 2- or 3-year period before the redemption. Eunice Postma had been employed by the corporation, and its predecessor restaurants at that location, for more than 20 years. After the redemption,

12 The promissory note was executed by petitioner's son in his capacity as president of the corporation and in his individual capacity. The promissory note provided as follows:

PROMISSORY NOTE Omaha, Nebraska January 16, 1975

For a valuabe [sic] consideration, receipt of which is hereby acknowledged, the undersigned, Stockade Cafe, Inc., a Nebraska corporation, and Michael L. Cerone personally, hereby promise to pay to Michael N. Cerone, or order, the sum of $100,000.00, payable over a period of seven years in equal semi-annual payments due on May 1st and December 1st of each year commencing May 1, 1975, with interest at the rate of 6 1/2% per annum on the unpaid balance. The maker shall have the right to pay any sum so long as it does not exceed $30,000.00 in any one year on principal, plus interest.

Petitioner insisted on this promissory note because he thought that it would be easier to sue on a note if payments thereunder were not made.

13 Although the corporation was not to receive petitioner's stock until May 1, 1975, for convenience we refer to Jan. 1975, as the date the redemption occurred because the parties treated the redemption as being settled on that date and because petitioner relinquished control of his stock on that date. Whether the stock was redeemed on Jan. 16, 1975, or on May 1, 1975, is not determinative of any issue before the Court.

14 Petitioner's son and Nancy Cerone were married from sometime during 1967 until January of 1983.

Nancy Cerone assumed responsibility for hiring and firing waitresses and other restaurant personnel, as well as some kitchen personnel. She prepared work schedules and the payroll. She also arranged substitutes for absent employees. Eunice Postma helped prepare work schedules and supervised other employees. Petitioner's son continued to handle the responsibilities he had before the redemption. Petitioner's son, Nancy Cerone, and Eunice Postma arranged their schedules so that one of them was always at the restaurant and bar.

The redemption agreement did not provide that petitioner would continue as an employee of the corporation after the redemption. At no time during the negotiations or consummation of the redemption did petitioner and his son enter into any other oral or written agreement that petitioner would continue as an employee of the corporation. Petitioner may have remained away from the restaurant for about a month after January 16, 1975. If so, then approximately 1 month after the redemption, Mick asked petitioner to come back and run the cash register in the restaurant.15 Petitioner did so.16

Petitioner worked full time (between 30 and 40 hours each week) for the corporation in 1975, 1976, and 1977, and at least until sometime during 1978. Thereafter, he worked only part time, usually on Friday and Saturday nights. Petitioner continued to work part time for the corporation at least through 1979 and probably until 1980 or 1981.17 He

15 The record does not indicate when petitioner stopped working for the corporation. In fact, it is not clear that he did. Portions of the testimony of petitioner and his son imply that petitioner stopped working for the corporation for a period of time and then returned to work approximately 1 month after the redemption, at the son's request. However, none of the witnesses, including petitioner, himself, directly testified that his employment ended and began again. In contrast, there was an abundance of direct testimony and documentary evidence that petitioner resigned from his corporate positions and abdicated his managerial and check-signing authority. Moreover, there was no diminution in petitioner's salary for 1974 and 1975, the years in which his employment might have been interrupted, from his salary for 1973 and 1976, the preceding and succeeding years.

16 If petitioner or his son had known that petitioner's employment with the corporation after the redemption would create the issues involved in this case, petitioner would not have continued to work for the corporation. Petitioner did not need the job. He could have worked as a painting contractor, as he had before buying the business, and as he did after leaving the corporation's employ. Also, he was receiving the installment payments for his stock. However, the record does not indicate that petitioner or his son sought any tax advice in regard to structuring the transaction. Their attorney, Kelley, was not a tax lawyer, and at the trial he did not know what the tax issues were in this case.

17 Petitioner testified that he worked part time for about his last 3 years with the corporation. Petitioner also testified that he worked for the corporation until "probably [19]80,

stopped working for the corporation after suffering a heart attack while on vacation in Texas.

During 1975 through 1979, the corporation paid petitioner the following annual salaries:

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The corporation did not pay petitioner any bonuses during these years. The record does not indicate whether petitioner received any salary from the corporation in 1980 and 1981. See note 17 supra.

Throughout his employment after the redemption, petitioner's responsibilities primarily involved handling the cash register in the restaurant.18 During that time period, petitioner's son suffered from a number of physical ailments. He had continuing back problems, 19 sometimes suffered severe migraine headaches, and also had high blood pressure. At some point, he became addicted to prescribed drugs.20 These physical ailments sometimes caused petitioner's son to be absent from the business.21 Nonetheless, at

[19]81, somewhere in there." He indicated that his tax returns would show the facts, but his returns for 1980 and 1981 are not in the record. On rebuttal, his son testified that petitioner stopped working for the corporation in the summer of 1979. We find as a fact that petitioner was employed by the corporation at least until the summer of 1979, and probably until 1980 or 1981, about coterminous with the period of the installment payments from the corporation. The son sold the business in 1982.

18 Petitioner's son testified that petitioner "ran the cash register and the restaurant side" of the business. He also stated that petitioner's job was to "take the money in the cash register, and oh, seat people and so forth." However, Nancy Cerone testified that "petitioner just ran the cash register, and that's all he ever did." She also testified that "sometimes when you run the cash register, you may occasionally [seat people], but there is a hostess there to do that. That wouldn't have been his job, no." Nancy Cerone directly supervised petitioner and other aspects of the restaurant outside of the kitchen after the redemption. Petitioner's son was not directly involved in the day-to-day operations of the restaurant other than the kitchen and the bar. We find that petitioner's responsibilities primarily involved handling the cash register in the restaurant.

19 Petitioner's son underwent back surgery in July of 1974. This surgery did not alleviate his back problems, although they did improve somewhat.

20 This may not have occurred until after petitioner stopped working for the corporation. An earlier trial date for this case was postponed because petitioner's son had been hospitalized and was not available to testify at that time.

21 Petitioner's son testified that he missed 2 or 3 days of work every once in a while but not that often. He stated that he was hospitalized only "a couple of times." Nancy Cerone testified that his health problems interfered with Mick's being active in the business "Quite a bit." However, she also stated that she could not say how many days he normally missed per

no time after the redemption did petitioner exercise any managerial authority in the restaurant or in the bar. Petitioner had no authority to hire and fire personnel nor did his son consult with him regarding any management decisions. When petitioner's son was absent, Nancy Cerone usually took over his responsibilities. Additionally, a number of kitchen employees became experienced enough that they could help with ordering food and other of his duties when petitioner's son was absent from work.

In early 1982, petitioner's son sold the business for over $1 million.22 The operating assets of the business have been sold. However, the corporation has not yet been dissolved pursuant to Nebraska State law. It is retaining some of its assets until this case is concluded.

During the taxable years in issue, the corporation paid petitioner the following amounts pursuant to the redemption agreement and promissory note:

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1The corporation and petitioner designated the payments as principal or interest. Although respondent stipulated to the amounts of the pay. ments, he specifically disagreed with their designation as principal or interest.

On the Schedule D (Capital Gains and Losses) attached to their return for each year in issue, the individual petitioners reported as long-term capital gain, under the installment method, a portion of the total payments designated as principal that petitioner received from the corporation

month because "some months he wasn't absent at all." Respondent seems to argue that petitioner was really running the business, because of the son's physical problems, but the record does not support any such contention.

22 Petitioners have requested the Court to make detailed findings about the 1982 sale, but the son's sale is irrelevant to any issues before this Court. There is no suggestion by respondent that petitioner Michael N. Cerone benefited in any way from the son's 1982 sale of the business.

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