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This factor favors petitioner.
12. Employee's Guaranty of the Employer's Debt
In deciding whether compensation is reasonable, courts have
considered whether the employee personally guaranteed the
employer's debt. See R.J. Nicoll Co. v. Commissioner, supra at
51. Choate personally guaranteed petitioner's debt in the early
years.
Respondent points out that in petitioner's fiscal year
ending June 30, 1991, petitioner had a $250,000 line of credit at
the prime rate guaranteed by a shareholder (presumably Choate),
which there is no evidence petitioner used. Respondent also
contends that Choate profited by lending substantial amounts of
money to petitioner in calendar year 1992 at an interest rate of
13 percent. Despite this, there is no doubt that Choate
personally guaranteed petitioner's debt.
Respondent contends that Dudley assumed financial risk for
petitioner. Respondent bases this on the fact that Dudley
pledged his home as collateral to Choate when Dudley bought 5
percent of petitioner's stock. Dudley did not assume financial
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