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divorced prior to the trial of this case. Each of the Penalbas
held 50 percent of petitioner's stock during the years 1988
through 1990. The initial investment of the Penalbas in
petitioner's stock was a total of approximately $15,000. When
petitioner first began its operations, its conversion was all
done through commissioned knitting, dyeing, and finishing plants.
After 1987, petitioner stopped selling woven fabrics and started
selling only knitted fabrics. In 1990, petitioner was involved
in some resales of both gray goods and finished goods.
Mrs. Penalba was the chief financial officer and secretary
of petitioner during its fiscal years 1987 through 1990, and Mr.
Penalba was its president during those years. Petitioner hired a
bookkeeper in 1985. Sometime after the bookkeeper was hired,
petitioner hired a receptionist who was trained in production.
In 1987 or 1988, petitioner began to hire outside salespeople.
Petitioner designed its own fabrics, and most of the fabrics
it sold to customers were of petitioner's own designs. Both Mr.
or Mrs. Penalba would discuss development of a fabric which was
being designed, but Mr. Penalba actually designed the fabric.
Mr. Penalba would determine such aspects of the fabric as the
type of thread to be used, the construction needed for the
fabric, whether the fabric needed stretchability on the width or
length, or whether the fabric was to be top or bottom weighted.
Mr. Penalba was responsible for selecting the proper yarns, the
proper equipment, the knitting weights, and the work requirements
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