E.J. Harrison and Sons, Inc. - Page 17

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               Petitioner argues that, during the audit years, Mrs.                   
          Harrison provided significant services to petitioner consisting             
          principally of (1) her services as a member of petitioner’s board           
          of directors, (2) her public relations activities, i.e., her                
          activities as petitioner’s primary representative at numerous               
          charitable and civic events in the communities served by                    
          petitioner, and (3) her personal guaranty of the line of credit             
          to petitioner from Bank of America.  Petitioner also argues that            
          its return on equity during the audit years would have satisfied            
          an independent investor in petitioner.  On that basis, petitioner           
          argues that it is entitled to deduct the entire amount paid to              
          Mrs. Harrison during the audit years as reasonable compensation             
          for services rendered.                                                      
               C.  Analysis                                                           
                  1.  Applicable Caselaw                                              
               Because petitioner’s principal place of business is in                 
          California, it is likely that any appeal of this case would be to           
          the Court of Appeals for the Ninth Circuit.  See sec.                       
          7482(b)(1)(B).  Therefore, we must apply that court’s                       
          jurisprudence governing issues of reasonable compensation in                
          accordance with the doctrine of Golsen v. Commissioner, 54 T.C.             
          742 (1970), affd. 445 F.2d 985 (10th Cir. 1971).                            


               2(...continued)                                                        
          forth in Nor-Cal Adjusters v. Commissioner, 503 F.2d 359, 361-362           
          (9th Cir. 1974), affg. T.C. Memo. 1971-200.                                 




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