Kandiah and Nalini Jeyapalan - Page 3




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               On January 20, 1988, the partnership obtained a loan in the            
          amount of $403,000 from Great Midwestern Bank (Great Midwestern).           
          The loan was secured by a deed of trust on the Fresno property              
          and was individually and personally guaranteed by all of the                
          partners.                                                                   
               In 1991, to avoid the personal liability exposure inherent             
          in conducting business as a partnership, the partners agreed to             
          convert the partnership to an S corporation.  The partners                  
          incorporated Clovis A.S.K. Properties, Inc. (ASK Properties), an            
          Ohio corporation, on January 3, 1991.  Since its incorporation,             
          ASK Properties has engaged in the business of renting out the               
          apartments on the Fresno property.  Petitioners, together,                  
          received 25 percent of the outstanding stock of ASK Properties              
          upon its incorporation.  Petitioners acquired the remaining                 
          75 percent of the outstanding stock in 1992.  The Internal                  
          Revenue Service informed petitioners in March 1991 that a request           
          by ASK Properties to be treated as an S corporation had been                
          approved.                                                                   
               The partners agreed that it would be in their best interests           
          to transfer all of the partnership assets and liabilities to ASK            
          Properties, including the Fresno property subject to the deed of            
          trust.  Shortly after forming ASK Properties, the partners                  
          attempted to transfer the Fresno property and their debt                    
          obligation on the Great Midwestern loan to the corporation.                 





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