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purpose of securing both short- and long-term returns on his
investments. During the years at issue, petitioner was engaged
in a business activity with Peter Lee (Lee) involving the
purchase and resale of computer chips.
In December 1990, petitioner and Stanley M. Friedman
(Friedman) executed a joint venture agreement with Lee setting
forth the terms and conditions for the purchase and resale of
computer chips. According to the joint venture agreement,
petitioner and Friedman were to invest approximately $1 million
and $2 million, respectively, with Lee for the purchase and
resale of computer chips. Although petitioner and Lee formalized
their arrangement with a joint venture agreement, most of
petitioner’s transactions with Lee were done on a handshake.
During the years at issue, petitioner advanced funds to Lee
in order to provide him with the necessary capital to buy the
computer chips. Lee would use these funds to purchase computer
chips and then sell the chips to third parties. After the chips
were acquired by Lee and sold to third parties, Lee would return
the funds advanced by petitioner, and pay an additional specified
rate of return on those advanced funds. This specified return
represented some portion of Lee’s profit from the resale of the
chips. Lee also paid petitioner a commission for referring other
investors to him.
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