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August 1987. In September 1987, NCAC purchased 100 percent of
the common stock of Norcom in a leveraged buyout. Norcom is the
only operating company in petitioners’ affiliated group. It
manufactures and wholesales school supplies, such as notebooks,
filler paper, and binders. From the time of its acquisition by
NCAC through the end of 1996, Norcom has been a thinly
capitalized and highly leveraged company.
2. Petitioners’ Owners
During all time periods relevant to this case, petitioners
were controlled by H. Ross Arnold (Mr. Arnold). From September
1987 through January 1991, Mr. Arnold owned 82.33 percent of
ICHC. From January 1991 through 1996, ICHC was 100-percent owned
by Mr. Arnold.2
Mr. Arnold is a nonpracticing attorney who previously worked
in investment banking. Mr. Arnold is in the business of
purchasing small and medium-sized closely held companies through
leveraged buyouts. Generally, Mr. Arnold does not involve
himself in his individual capacity in the day-to-day operations
of the companies he owns. Instead, Mr. Arnold uses another
company he owns, Quest Capital Corp. (Quest), to provide
2 The only other ownership interests in petitioners were
held by Paul F. Lombardi (Mr. Lombardi) and Mr. Arnold’s wife.
Mr. Lombardi owned approximately 1 percent of the common stock of
NCAC from April 1990 through April 1994. From April 1994 through
the end of 1996, Mr. Arnold’s wife owned 1 percent of NCAC.
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