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In September of 1990, Houston and Paik formed a second
partnership named Inkax. Thereafter, Inkax, contacted Dooyong
Industries Co., Ltd., (Dooyong), a Korean video game designer,
for the purpose of determining whether Dooyong could develop two
prototype video games for Inkax. Sometime between May and
September of 1990, Dooyong began developing video game boards for
Inkax. Inkax and Dooyong did not execute a formal contract
memorializing their arrangement. From the time of its formation
until the date of trial, the only business that Inkax had ever
engaged in was the research and development transaction with
Dooyong.
In October of 1990, 3-Koam issued a purchase order to Inkax
for the research and development of two video games. In November
and December of 1990, Inkax sent three invoices to 3-Koam
totaling $90,000 for the cost of video game development.
Thereafter, 3-Koam paid Inkax $90,000, consisting of two checks
in December of 1990 for $30,000 and $40,000, and one check in
March of 1991 for $20,000. On its 1990 Form 1065, 3-Koam
deducted $90,000 in research and development expenses. Sometime
after March 21, 1991, Inkax returned the $90,000 to 3-Koam in one
or more payments.
On December 3, 1990, Dooyong sent Inkax an invoice for
$82,000, reflecting the charge for video game development. On
March 17, 1991, in exchange for the two video games, Inkax issued
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