Taiyo Hawaii Company, Ltd. - Page 12

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          and financial records.  Kubota was one of four individuals who              
          operated and managed petitioner.  He worked with Michio Ito, a              
          representative of Seiyo who supervised petitioner's Hawaiian                
          operation.  Seiyo, through Ito, instructed Kubota with regard to            
          the advances, to accrue certain interest amounts on petitioner's            
          books and records.                                                          
               Kubota had difficulty differentiating petitioner's real                
          estate development from its real estate investment activity.                
          Overall, Kubota believed that petitioner would not have had                 
          sufficient funds to pay its bank debt and develop its properties,           
          as well as maintain and hold the Ginter and Gomes properties, if            
          it had not obtained the advances from Seiyo.  Kubota also                   
          believed that petitioner was willing, at any point, to sell the             
          Ginter and Gomes properties provided that a bona fide offer was             
          received.  Kubota thought that the advances from Seiyo and Taiyo            
          Development to petitioner were not considered a priority item for           
          repayment.                                                                  
               Petitioner's accountant, Tsukamoto, included the advances              
          from Seiyo and Taiyo Development as liabilities on Schedule L of            
          petitioner's Federal income tax returns.  In Tsukamoto's                    
          professional judgment petitioner did not have the financial                 
          ability to pay interest and amortize principal on the advances.             
          The advances to petitioner from Seiyo and Taiyo Development                 
          enabled it to make payments on principal and interest to third-             





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