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sufficient retained earnings to pay a dividend. Thus,
application of factors (3) and (4) militates against the
deductibility of any portion of the amounts paid to Mrs. Harrison
during the audit years as compensation for guaranteeing loans to
petitioner. Moreover, there is no evidence that businesses of
the same type and size as petitioner customarily were required to
pay guaranty fees to shareholders (factor (2)).
Petitioner has also failed to establish what amount, if any,
would have constituted a reasonable fee for Mrs. Harrison’s
personal guaranties (factor (1)). There is no evidence of any
significant financial risk to her. She was one of four
guarantors, each jointly and severally liable for the guaranteed
amounts. None of her property was encumbered under the terms of
the guaranties, and there was never any threat of default by
petitioner as primary debtor. Nor has petitioner shown that
there was a disproportionate reliance by the bank on Mrs.
Harrison’s personal assets to satisfy the potential obligations
of the guarantors. Mr. Summers, when asked why the bank required
4(...continued)
continuing guaranty was in effect) was not significantly
different as a percentage of total officer compensation from what
it had been for the years immediately preceding her guaranty. In
fact, her average compensation as a percentage of total officer
compensation for 1992 and 1993 (38.5 percent) was actually higher
than for 1994-97 (36.5 percent). Thus, there is no evidence to
indicate that the board awarded any additional compensation to
Mrs. Harrison for the audit years in consideration of her
personal guaranty of bank loans to petitioner.
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