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would have manufactured the wheel, and its profits might have
permitted K&H to recoup its costs. The level of production
necessary to permit K&H to recoup its costs was never achieved.
When K&H purchased materials to fulfill contracts with
customers, to the extent that it had not been repaid and/or had
not yet billed the customer, K&H either treated the outstanding
amount as an asset or advance to the customer or, if it pertained
to research and development, claimed it as an expense.
In one instance, K&H, at its own expense, built a dedicated
facility for Apple Computer (Apple), and then recouped its
capital outlay by means of a production contract with Apple. K&H
built conveyance, assembly, and painting equipment, and purchased
the enclosures that were delivered to K&H’s facility where they
were assembled, coated and/or painted, and then shipped to Apple.
The sales of the product to Apple permitted the recoup of its
capital outlay and also produced a 15-percent profit for K&H.
Hot Snacks, Inc. (Snacks), a C corporation, in January 1988,
commenced a business with the goal of creating a computer-
controlled vending machine that would dispense a french fried
product, freshly fried in oil. One of K&H’s employees brought
the opportunity in Snacks to petitioner’s attention. This
opportunity was part of K&H’s attempt to find new customers and a
source for revenue. Petitioner invested $120,000 in Snacks at a
time when a prototype of the computer-controlled vending machine
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