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president of Snacks and was given authority to deal directly with
K&H in accord with certain waivers that were made by Snacks’
shareholders. Snacks had also entered into joint venture
agreements with Korean companies for certain aspects of the
manufacture of the vending machines to be used in Southeast Asia.
K&H advanced cash to Snacks, and each such advance was
formalized in a promissory note due 1 year from its date of
execution. The notes, signed by petitioner on behalf of Snacks,
were dated from June 1988 through August 1993, and totaled
$1,880,000. Generally, the advances were used for Snacks’
operating expenses. The advances were carried on Snacks’ and
K&H’s financial records and K&H’s tax returns as loans or debt.
K&H, on its Federal income tax returns, reported interest income
from the notes. A foreign company paid Snacks $600,000 for a
license to sell the vending machine in a particular locality, and
from that $300,000 was repaid to K&H during June 1990. Other
than the $300,000 repayment, no other repayments were made, and
no attempt was made to collect the balance because Snacks was
unprofitable. K&H expected to earn income and profits from its
relationship with Snacks by assembling vending machines. It was
estimated that K&H would make $500 per vending machine and that
there would be a 100,000-unit market demand, resulting in
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