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Well before the audit years, the family formed Rentals,
which purchased trucks from petitioner. Since that time,
petitioner has leased most of its trash hauling trucks from
Rentals. During the audit years, Rentals was owned 55 percent by
Mrs. Harrison and 15 percent each by Myron, James, and Ralph.
Loan Guaranties
Before the audit years, the California legislature passed a
recycling law (known as AB 939) that required California cities
to recycle 50 percent of their waste, all of which had previously
been dumped into landfills. In order to comply with AB 939,
petitioner was required to supply each of its individual
customers with three barrels instead of one: A trash barrel, a
recycle barrel, and a green waste container for lawn or grass
trimmings. In order to raise the cash needed to purchase the
additional barrels and related equipment, petitioner and Rentals
arranged for loans from Bank of America. On June 1, 1992, and on
May 3, 1996, Bank of America, as lender, and petitioner and
Rentals, as borrowers, entered into business loan agreements
(loan 1 and loan 2, respectively). Loan 1 provided a $1.5
million line of credit secured by the personal property financed
by the loan and was conditioned, in part, on the execution of
guaranties by Mrs. Harrison, Myron, James, and Ralph, each in the
sum of $1.5 million. Pursuant to amendments to loan 1 dated
August 14, 1992, and June 13, 1994, the line of credit was
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