Indmar Products Co., Inc. - Page 10

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          balanced out over time because the prime rate fluctuated above              
          and below 10 percent.  The prime rate, however, exceeded 10                 
          percent only from November 28, 1988, to January 8, 1990.  Indeed,           
          the prevailing interest rate was irrelevant.  The Rowes simply              
          wanted to receive a 10-percent return.                                      
          II. Petitioner and the Rowes Manipulated Facts and Violated                 
               Legal Agreements                                                       
               To avoid being subject to the Tennessee tax on interest and            
          dividends, petitioner and the Rowes took the position that the              
          transfers were demand notes.  Petitioner, however, reported the             
          transfers as long-term liabilities on its financial statements.             
          Mr. Holmes readily admitted that the transfers were reported                
          incorrectly.  In addition, petitioner and Mr. Holmes knowingly              
          mischaracterized the transfers as long-term liabilities to comply           
          with FTB’s loan agreements.                                                 
               To justify the reporting of the transfers as long-term                 
          liabilities, petitioner and the Rowes executed annual waivers.              
          Mr. Rowe, however, testified that he did not consider the waivers           
          to be legally binding and that the waivers would not prevent                
          petitioner from repaying him on demand.  While the waivers were             
          disclosed in the financial statements from 1989 to 2000,                    
          petitioner paid the Rowes on demand.                                        
               Mr. Rowe also testified that the informal undocumented                 
          agreements with petitioner were consistent with a history of                
          “handshake deals” he had with petitioner and other business                 

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