4
submitted financial statements to Frost Bank. The credit line
was documented by 14 promissory notes, each payable 90 days after
execution. They were dated from October 7, 1985, through January
10, 1989. The final note, dated January 10, 1989, states a
cumulative principal loan balance of $467,508.54. Petitioner and
DRPC were jointly and severally liable on the notes for repayment
of the loan.
The loan was not collateralized with any property of
petitioner or DRPC. On November 16, 1986, a guaranty agreement
was executed by petitioner, DRPC, and Don Test, under which Don
Test would guarantee the loan for a fee of $14,998.50 for each
90-day period that the guaranty was outstanding. Petitioner and
DRPC were jointly and severally liable to Don Test for payment of
the fee. Frost Bank would have granted the line of credit to
either petitioner or DRPC individually, but to neither without
Don Test's guaranty. In addition to the guaranty, Don Test
provided common stock of the Genuine Parts Co. as collateral.
Don Test was not a shareholder or otherwise related to the
corporation. DRPC paid the guaranty fees and claimed $60,994 and
$59,994 as expenses on its income tax returns for 1987 and 1988,
respectively. It does not appear that petitioner paid any part
of the guaranty fees.
Petitioner had total discretion as to the use of the
proceeds, and Frost Bank did not monitor such use. The line of
credit was used both as a source of operating capital for DRPC
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