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programmers, and was involved in beta testing the developed
software.
Petitioner chose to secure development funding through CPSG,
Inc. In order to memorialize his indebtedness to CPSG, Inc., on
October 1, 1995, petitioner signed an unsecured, interest-bearing
promissory note in favor of CPSG, Inc. for an amount not to
exceed $1.4 million. According to the terms of the note,
petitioner is personally liable for the amounts expended by CPSG,
Inc. up to the stated maximum ($1.4 million), the principal of
which is due on October 1, 2005. The interest rate was set
quarterly to the prime rate and was payable in annual
installments beginning on December 31, 1996.
CPSG, Inc. did not have sufficient cash to advance all the
research and development costs to which petitioner obligated
himself. Accordingly, petitioner arranged for Uniplex Software,
Inc.10 (Uniplex Software) to lend funds to CPSG, Inc. Uniplex
Software advanced to CPSG, Inc. a total of $1.15 million in
payments of $750,000 and $400,000 on February 5 and July 11,
1996, respectively. On October 1, 1996, CPSG, Inc. executed a
promissory note to memorialize the loans made by Uniplex
Software, not to exceed $1.15 million. Pursuant to the terms of
10CPSG Ventures owned 50.1 percent of Uniplex Software, and
IMI owned 49.9 percent. IMI is a United Kingdom publicly traded
corporation. Petitioner owned 70 percent of CPSG Ventures, a
general partnership, and Karan Erickson, an officer of CPSG,
Inc., owned 30 percent.
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