E.J. Harrison and Sons, Inc. - Page 33

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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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