Vitamin Village, Inc. - Page 8

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          its employees including $125,000 in bonuses.  Petitioner deducted           
          these amounts as salaries and wages paid to its employees on its            
          Forms 1120 in the fiscal years at issue.                                    
               Petitioner did not maintain a compensation policy for its              
          officers and employees.  However, all 12 of petitioner’s                    
          memorandums of consent to corporate action from FYE June 30, 1985           
          through 1996, indicated Mr. Reeves received less than full and              
          adequate compensation for his role as petitioner’s president and            
          that petitioner would give future consideration to increasing Mr.           
          Reeves’s salary and/or award future discretionary bonuses to                
          reimburse him for his past and present service.                             
               The bonuses Mr. Reeves and petitioner’s other employees                
          received were not based upon a formula or previously set forth in           
          writing.  Each bonus was determined and paid at the end of the              
          fiscal year when petitioner could ascertain its cash availability           
          and determine what would be a reasonable bonus, taking into                 
          consideration previous underpayments.                                       
          E.   Advertising Agreement With UMI                                         
               In the fiscal year previous to UMI’s formation, petitioner’s           
          gross skin care and tanning products sales totaled $600,000 with            
          $124,000 profit.  In an effort to increase sales, in June 1995              
          (in petitioner’s FYE June 30, 1995), petitioner entered into an             
          agreement with UMI by which, in exchange for $1 million, UMI                
          agreed to brand, market, and advertise the skin care and tanning            

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