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the Plan ($2,158); (2) dividends from Dura-Craft equal to one-
half of the difference between the $33,000 of interest owed by
Dura-Craft on its corporate loan and the $37,185 actually paid by
Dura-Craft to the Plan ($2,092); (3) interest income equal to
one-half of the interest owed by Dura-Craft ($16,500) and by
Springbrook ($7,000) on the respective corporate loans but paid
to the Plan.
B. Northwest
Northwest was incorporated in 1978 as a corporation electing
small business status under subchapter S and is equally owned by
David Christie and Milo Chapman. During 1988, 1989, and 1990,
Northwest had no employees and had the same telephone number,
business address, and office space as Dura-Craft. For its
taxable years ending October 31, 1988 and 1989, Dura-Craft
purchased all of its raw materials from Northwest. Northwest
sold Dura-Craft these raw materials at Northwest's cost, plus a
5-percent processing fee. For the years ending October 31, 1988
and 1989, Dura-Craft paid Northwest processing fees of $39,840.83
and $55,572, respectively. As Northwest had no employees, all of
Northwest's orders were placed by Dura-Craft employees and
delivered directly to the Dura-Craft plant. Northwest maintained
its own set of accounting records and filed its own tax returns
for the taxable years ending July 31, 1989 and 1990. Respondent
disallowed the payments Dura-Craft claimed as cost of goods sold
for taxable years ending October 31, 1988 and 1989.
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