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We find most relevant the percent of stock owned by each of
the Officers in determining whether their compensation is
attributable to arm's-length bargaining. Mr. Woll was a minority
shareholder, and he was constantly trying to increase his
ownership interest and salary. Mr. Laviano, on the other hand,
was the majority shareholder. He wanted petitioner to keep cash
reserves in the business for working capital. We believe that
Mr. Woll bargained at arm's length with petitioner.
Given Mr. Laviano's relationship to petitioner as its
controlling shareholder, we must inquire whether an independent
investor would have paid Mr. Laviano the amount of compensation
that he received during the subject year. See Owensby &
Kritikos, Inc. v. Commissioner, supra at 1326-1327; see also
Elliotts, Inc. v. Commissioner, supra at 1246-1247. We conclude
that an independent investor would have approved of the
compensation paid to Mr. Laviano, in view of the nature and
quality of the services that he performed for petitioner and the
effect of his services on a hypothetical investor's return on
investment. This factor favors petitioner.
m. Whether Employee Guaranteed Employer's Debt
Courts have considered whether an employee personally
guaranteed his or her employer's debt, in determining whether the
employee's compensation is reasonable. In certain situations, an
employee's personal guaranty of his or her employer's debt may
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