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to petitioners. The purchase price of the building was $120,000,
which included seller financing and the assumption of an existing
mortgage.
Dr. Rao decided to borrow money for improvements to the
building. Upon application for a loan to Columbia Savings & Loan
Association (Columbia), the bank told Dr. Rao that it would not
make a loan to him on a personal basis, but rather would make a
loan to a corporation. Dr. Rao formed Kondamudi Enterprises,
Inc. (Kondamudi). Kondamudi was formed for the purpose of
obtaining the loan from Columbia. On September 11, 1981,
Kondamudi obtained a building loan mortgage from Columbia in the
amount of $120,000 at 18 percent interest per annum.
Approximately $43,000 was to retire existing debt on the medical
center, and the remaining $77,000 was designated for
improvements. Petitioners established a bank account in the name
of Kondamudi at Midlantic National Bank to pay off the Columbia
loan. The loan payment was approximately $2,400 per month. Mr.
Raclaw prepared the corporate tax returns for Kondamudi.
On May 17, 1981, Dr. Rao entered into a contract with, and
employed, general contractor Kostas Tsichlis (Tsichlis) to make
improvements to the medical center. Tsichlis furnished
petitioner with a $70,000 estimate for improvements to the
medical center. Though improvements to the medical center were
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