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the accrual method of accounting. Qulart was inactive through
its fiscal year ending June 30, 1983. On July 1, 1983, Bruce
transferred all of the stock of Qulart to Marion Hunt, the third
owner-employee of BBPA. Qulart had the same business address as
BBPA. Qulart did not, however, have a bank account, nor did it
prepare financial statements for credit purposes.
Fred intended Qulart to be a conduit between Machise and the
MIT 83 partners. As with MIT 82 and MIT 80, Machise was the
funding source of the noncash portion of the partners'
investments, but the loans from Machise to the partners and their
notes to Machise in return were both to pass through Qulart.
Qulart's borrowings and lendings, like its reported income and
expenses for tax purposes, were a wash.
During the years in issue, the stated purpose of Qulart was
to prevent Machise from assigning to third parties the investors'
notes used to finance the employee leasing operations. Other
than the change made by inserting Qulart, the funding of MIT 83
was the same as that of MIT 82. Thus, the plan was that MIT 83
would advance ten-elevenths of its capital to Machise.
Accordingly, 23 of the MIT 83 partners executed notes to
Qulart, dated July 1, 1983, in amounts aggregating $2,623,666.
The notes required annual payments of interest only, at a rate of
12 percent per annum, and did not provide for repayment of the
principal until July 1, 1994, 11 years after their dates of
execution. Fred and Bruce were partners in MIT 83 and executed
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