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Mr. and Mrs. Penalba, along with Mike Macias (Mr. Macias),
owned a knitting plant, U.S. Fabrics Corp. (U.S. Fabrics), in
1990. Mr. and Mrs. Penalba together owned 65 percent of U.S.
Fabric. U.S. Fabrics was an S corporation during 1990.
Approximately 40 to 50 percent of U.S. Fabrics' business was
production for petitioner. Mrs. Penalba was involved in setting
up U.S. Fabrics in 1990, and provided some management to U.S.
Fabrics in that year. Mrs. Penalba spent approximately 5 percent
of her time working for U.S. Fabrics. Mr. Penalba met with Mr.
Macias at least 2 to 3 times per week and sometimes once a day.
Mrs. Penalba earned $79,938 from U.S. Fabrics during the calendar
year 1990, and Mr. Penalba earned $79,939 from U.S. Fabrics
during that year. U.S. Fabrics had its offices in the same
building as petitioner.
Long Beach Dyeing and Finishing (Long Beach) was a dyeing
and finishing plant owned by the Penalbas, with Rodolfo Saldias
(Mr. Saldias), who was a salesman for petitioner.
The Penalbas owned the building in which petitioner and U.S.
Fabrics had offices, and the Penalbas leased building space to
these companies. Petitioner paid $129,775 in rent to the
Penalbas during the calendar year 1990. The Penalbas, along with
Mr. Blumberg, determined a fair rental for petitioner to pay the
Penalbas.
Petitioner paid sales commissions of $578,947 during its
fiscal year 1990. The rate of commission that petitioner paid
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