On July 10, 2000, approximately 1600 mountain daylight time, a kit-built amphibious Rebel, N6317Y, registered to and operated by the second pilot as a 14 CFR Part 91 instructional flight, experienced a control system failure during the descent for landing on a lake located about 10 miles northeast of Libby, Montana, and collided with the water. Visual meteorological conditions prevailed at the time and no flight plan was filed. The aircraft was substantially damaged. The flight instructor and private pilot were not injured. The flight originated from the Libby Airport about one and a half hours prior to the accident. The flight instructor reported that he had just sold the aircraft to the second pilot, and this was the first instructional flight for his seaplane rating. During the descent for landing, with the second pilot at the controls, the aircraft began to turn to the left. The flight instructor took over the controls at about 20 feet above the water level and applied right rudder control to correct for the left turn. When the flight instructor applied pressure to the right rudder pedal, there was no rudder response. The flight instructor continued with the landing and the aircraft touched down on the water with an approximate 15 degree yaw to the left and left wing low. The aircraft spun around to the left and the right side float contacted the water. The aircraft came to rest about 180 degrees from the direction of travel with the aircraft heeled over to the right about 30 to 40 degrees with the right wing in the water. The aircraft then righted itself and returned to level attitude. After the aircraft was recovered, the flight instructor, who is also an airframe and powerplant mechanic, and the builder of the aircraft, reported that the right side rudder control cable had pulled out of the Nicopress sleeve at the rudder pedal. The flight instructor also reported that he had purchased the kit partially constructed, and that the flight control cables had already been completed at the time of the purchase.