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clothing designed by Georgiou. The wholesale division sold
merchandise to two other corporations, which then sold the goods
at retail. The two other corporations were Naturelle
International, Inc., which was owned by Georgiou, and Alexia
Clothing, Inc. (Alexia), in which Georgiou was a minority
shareholder through 1988. Alexia had a supply contract with
Kolonaki that required Alexia to purchase all of its merchandise
from Kolonaki.
During 1988, Georgiou became interested in selling shares in
the retail division of Kolonaki to the public. GRS was
incorporated on approximately September 23, 1988, in California
to take over Kolonaki's retail operations. GRS acquired
Kolonaki's retail division pursuant to a two-part plan set forth
in a document titled "Agreement and Plan of Corporate Separation
and Reorganization" (the plan). As the first part of the plan
required, Kolonaki transferred to GRS certain business assets and
liabilities associated with Kolonaki's retail clothing business.
The assets included all operating retail stores and the assets
associated with those stores. The assets were transferred under
section 351, and the stock of GRS was issued in the name of
Kolonaki.
The second part of the plan provided that the GRS stock
would be distributed to Georgiou as part of a tax-free corporate
separation and exchange pursuant to sections 355 and 368. The
reorganization was subject to a condition precedent that required
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