George Georgiou and Judith Georgiou A.K.A. Judy Georgiou, et al. - Page 5

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            the parties to obtain an opinion from tax counsel that the                                     
            transaction would qualify as a tax-free exchange.  Because the                                 
            parties never obtained an opinion, GRS remained a subsidiary of                                
                  In 1988, Georgiou became interested in acquiring the assets                              
            of Petite Concept, Ltd. (Petite), a corporation that operated a                                
            chain of retail stores known as Karen Austin Petites.  The assets                              
            consisted primarily of leases, leasehold improvements, and                                     
            property.  Petite had filed bankruptcy in November 1988.                                       
            Georgiou formed JAI to acquire certain assets of Petite.  JAI was                              
            incorporated December 13, 1988, with Georgiou as the sole                                      
            shareholder.  Georgiou remained the sole record holder of JAI                                  
            stock from 1988 through the years in issue.  There were several                                
            business reasons to form JAI including:  Kolonaki had just spun                                
            off its retail division into GRS and adding a retail division                                  
            back to Kolonaki would have been counterproductive; GRS would be                               
            a less desirable investment if it attempted to sell shares to the                              
            public with a chain of bankrupt stores included in its assets;                                 
            and Georgiou did not want to provide either the Kolonaki or GRS                                
            financial statements to the Petite lessors because several of the                              
            lessors were also lessors of GRS stores.                                                       
                  In December 1988, Petite agreed to sell to Georgiou or his                               
            nominee the assets of 18 Petite stores.  Georgiou funded JAI with                              
            $1,186,000 ($234,000 designated as capital and $952,000                                        
            designated as three loans).  JAI issued 23,400 shares of stock in                              

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