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KOA was a “close corporation”3 incorporated in Delaware on
January 16, 1996. Petitioners started KOA with the concept that
it would become an Internet content provider, which would allow
customers to redeem frequent flier miles or loyalty points for
nontravel products or services, such as financial and educational
products that benefit children. KOA, primarily through the work
of petitioner Brody, obtained exclusive contracts with several
entities including, but not limited to, Days Inn of America,
Inc., on March 18, 1999, and Netstock Direct Corp. on August 6,
1999.
On December 15, 1997, petitioners and KOA, as coborrowers,
obtained a $50,000 loan from Franklin National Bank. This loan
was secured by petitioners’ personal residence. While KOA was
listed as a “Co-borrower”, petitioners repaid the loan in full on
April 12, 2000. The record does not contain information as to
the total amount of loan repayments made in 1999.
During the year in issue, petitioners sought additional
funding for KOA. A Confidential Private Placement Memorandum
dated April 1999, noted the following:
Clifford L. Brody, is Chairman and CEO of the Company.
Prior to founding KidsOA, Mr. Brody established
Clifford L. Brody Associates, Inc., a consulting firm
that served major banks and international corporations
in the development of new products and services. He
has provided strategic advisory services to introduce
3 The term “close corporation” is defined under Delaware
law. See Del. Code Ann. tit. 8, sec. 342(a) (2001).
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