Lee D. Froehlich - Page 7

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          with a total value of approximately $40,000.  These items were              
          placed in the auto dealership's used car inventory, and were                
          deemed to be assets on the company's books.  As part of the                 
          $806,000 capital requirement, petitioner executed a note in favor           
          of the auto dealership for approximately $150,000.  At the end of           
          the first year of the business, petitioner paid off this note               
          from a bonus of $236,000 that he received from the auto                     
          dealership.                                                                 
               The additional $400,000 needed to meet the $806,000 capital            
          requirement was to be borrowed from Golden State Sanwa Bank                 
          (Sanwa Bank).  In a July 9, 1986, letter setting forth Sanwa                
          Bank's terms and conditions for the capitalization loan (cap                
          loan), petitioner is denominated as "Borrower" and the auto                 
          dealership as the "Guarantor".  The stated purpose of the loan is           
          for "Permanent Working Capital".                                            
               On March 2, 1987, Sanwa Bank entered into a business loan              
          agreement with petitioner for the cap loan.  The $400,000                   
          promissory note contains the statement that the loan is "To                 
          assist with investment in auto dealership to meet permanent                 
          working capital needs of enterprise."  Petitioner is shown as the           
          borrower, and his occupation is listed as owner of the                      
          dealership.  On the same date, a Sanwa Bank corporate resolution            
          reflects that the auto dealership guaranteed the repayment of               







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