Milo G. and Sarah E. Chapman, et al. - Page 9

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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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