place them in "friendly hands."4 A number of events took place, including, in January 1979, petitioner's purchase of 43,500 shares of Hughes Supply stock in the following allotments:

The purchase price was paid with $36,500 of available cash from petitioner, $375,000 borrowed from Sun Bank on a demand note basis, and $500,000 borrowed from Sun Bank on a 10-year note secured by a mortgage on a portion of petitioner's real properties. The 43,500 shares of Hughes Supply stock served as collateral for the demand note.

Petitioner received an additional 21,750 shares of Hughes Supply stock on June 15, 1979, pursuant to a 3-for-2 stock split effective May 15, 1979.

In June and July 1980, petitioner acquired a total of 8,000 additional shares of Hughes Supply stock in three

'Apparently this further action was not discussed with the New York attorney. In 1980, however, Hughes Supply retained a brokerage firm to advise, among other things, with respect to appropriate courses of action, if any, in response to acquisitions or dispositions of major portions of its stock.

"In addition to the purchase of Hughes Supply stock by petitioner, the total number of shares available in a Hughes Supply stock option plan that had been created in 1973 for principal officers and executives was raised from 65,000 to 97,500 in 1978. The number of available shares were increased to 200,000 in 1982. Options to purchase were exercised as follows:

Hughes Supply retired 306,000 shares of its treasury stock in 1980.

In 1981, Hughes Supply adopted a trusteed Employee Stock Ownership Plan (ESOP) to which it issued 30,000 shares of new stock. On Dec. 31, 1981, the ESOP owned 53,769 shares. In addition, the Hughes Supply Profit Sharing Plan purchased shares of Hughes Supply stock. The plan owned the following shares on the dates indicated:

During 1981, Hughes Supply acquired by merger the Marbut Co., a closely held corporation with eight business locations in Georgia. In connection with the merger, 124,160 new shares of Hughes Supply stock were issued to Marbut Co. stockholders in 1981.

separate transactions for a total purchase price of $141,902. One hundred thousand dollars of the consideration for these purchases was borrowed from Sun Bank and the remaining balance of $41,902 was paid from petitioner's available cash assets.

Fifteen additional shares of Hughes Supply stock were acquired by petitioner on June 4, 1981, for $341.25, bringing the total holdings of Hughes Supply stock to 73,265 shares. These acquisitions, in conjunction with the other increases in stockholdings by "friendly" parties, helped assure that control of Hughes Supply would be retained.

By late 1982, the CED group was satisfied with the return on the Hughes Supply investment. On December 10, 1982, Edmundson International, Inc., a subsidiary of CED which owned the Hughes Supply stock,6 entered into a stock purchase agreement whereby Hughes Supply redeemed all 655,750 shares of Hughes Supply common stock held by Edmundson for a total purchase price of $16,393,750, or a per share purchase price of $25. The redemption was closed December 29, 1982. Pursuant to the terms of the agreement, Edmundson, for itself and its affiliates, agreed not to purchase in the aggregate, directly or indirectly, 2 percent of any class of equity securities of Hughes Supply within the 5-year period from the closing date.

On January 27, 1983, Hughes Supply's stock underwent another 3-for-2 stock split, increasing the number of shares held by petitioner from 73,265 to 109,897.

On April 15, 1983, Hughes Supply made a public offering of 850,000 shares of its stock. As part of this offering, 75,000 of petitioner's shares of Hughes Supply stock were sold.

Additional Investments

After the first public offering of its stock, Hughes Supply decided to own directly any new warehouses or other facilities it required rather than lease them from petitioner to avoid any appearance of impropriety. The previous leases

*Edmundson International, Inc. is a wholly owned subsidiary of CED engaged in the same business. At some point between the Nov. 9, 1979, Schedule 13D filing and the Mar. 7, 1980, Schedule 13D filing Edmundson became the owner of the Hughes Supply stock.

between petitioner and Hughes Supply were maintained in accordance with their terms, and the relationship between the two businesses continued in the same manner. Twelve of the leases were renewed for 10 years in 1978 and two were under 5-year leases from 1978 to 1983. In this respect, petitioner, as lessor, expanded its facilities leased to Hughes Supply as follows from 1970 to 1982:

Ft. Myers

Naples

7,000 sq. ft. addition to warehouse and paved area 5,000 sq. ft. addition to warehouse and paved area

Orlando

Winter Haven

(b) Paved area

(c) Addition to warehouse

(a) Relocation of garage and maintenance facility

(b) 30,000 sq. ft. addition to warehouse

(c) Outside storage

(a) 5,000 sq. ft. warehouse

(b) Showroom

When Hughes Supply went public and it was decided that it would acquire its own facilities, petitioner began investing in other activities. In 1974, petitioner acquired a 60-acre citrus grove adjacent to groves already operated by the Russell Hughes family. The grove was operated throughout the years in issue, and was later sold in 1982.

Petitioner also developed property adjacent to the Orlando Executive Airport as hangar facilities. These buildings were under lease during the years in issue to Red Lobster Corp., Florida Gas Co., Purolator Courier Corp., Sun Bank, and Hughes Supply.

Petitioner acquired an airplane in 1977 for approximately $250,000 which it leased primarily to Hughes Supply, but also chartered to other parties during the years in issue.

In February 1977 for $102,000, petitioner purchased a 60-percent interest in and acted as general manager of a general partnership known as Town & Country Properties. The partnership owned and operated a 96-unit apartment

"The successor to Florida Gas Co. is Continental Resources.

complex in Winter Park, Florida. A management firm was employed by petitioner to collect the rents and assist with day-to-day responsibilities. Petitioner remained a partner throughout 1979 and for a portion of 1980, when the apartment complex was sold at a substantial profit.

Petitioner contributed $56,000 in exchange for a 20percent partnership interest in Virginia Hall, Ltd., in 1977. Virginia Hall, Ltd., was engaged in the business of owning and operating a residential apartment complex in one of the more exclusive neighborhoods of Winter Park. Petitioner remained a partner throughout the years in issue and continued to hold the interest at the time of trial.

In 1979, an 8-percent interest in Nob Hill Properties, Ltd., was purchased by the corporation for $54,000, which interest was held throughout the years in issue. The arrangement was similar to the Town & Country partnership, and the Nob Hill property was in the same general

area.

In the latter part of 1981, petitioner's board of directors considered an investment of 5 percent of Highlands Golf Investments, Inc., in Highlands, North Carolina, along with the purchase of four residential lots in the Highlands project. The 5-percent interest was purchased in 1982 for $150,000 and the lots for $225,000. David Hughes had considered the investments personally before recommending them to the board.

In 1982, petitioner also traded in its airplane and purchased a new plane for a total cost of $347,750. In addition, $86,958 was expended for a 24-year old wooden fishing boat to be used as a commercial fishing boat. The boat was chosen after looking at other possible boats over a period of 1 to 11⁄2 years.

Financial Information

On its Federal income tax returns for the years in issue, petitioner reported the following assets:

The following reflects the liabilities, stockholder equity, and retained earnings of petitioner as of December 31 of the years in issue:

The parties stipulated that because petitioner was an affiliate of Hughes Supply during the years at issue, as that term is defined in subsec. (a)(1) of SEC rule 144, the sale of Hughes Supply stock by petitioner in brokers transactions or by market makers was subject to the requirements contained in that rule. Alternatively, petitioner could have sold its Hughes Supply stock through a private placement or a registered offering. Due to the size of petitioner's Hughes Supply stock holding and the Federal securities law limitations imposed upon the sale of the Hughes Supply stock held by petitioner as an affiliate of Hughes Supply, the net fair market value of all of petitioner's Hughes Supply stock, if sold in a single transaction to an entity or individual not affiliated or associated with it or with Hughes Supply, would have been 90 percent of the over-the-counter value of the stock, or $942,529, $1,125,637, and $1,108,099, as of Dec. 31, 1979, 1980, and 1981, respectively.