Vitamin Village, Inc. - Page 12

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               In 2002, Mr. Reeves sold his residence in Newberg, Oregon,             
          as part of a bankruptcy sale.  As part of the sale, petitioner              
          sold the floating structures to Mr. Reeves’s wife’s company,                
          Royal Sun Properties, L.L.C., for $100,000 with $55,000 paid as a           
               Respondent issued the notice of deficiency on March 8, 2002.           
          Petitioner timely filed its amended petition on August 19, 2002.            
          I. Reasonable Compensation                                                  
               Petitioner contends the amounts paid to its sole executive             
          and shareholder, Mr. Reeves, in the fiscal years at issue                   
          constituted reasonable compensation under section 162(a)(1).                
          Conversely, respondent contends Mr. Reeves’s compensation for the           
          fiscal years at issue was unreasonable but, on the basis of                 
          respondent’s expert’s opinion, concedes deductions of $1 million            
          and $750,000,13 respectively.                                               

               12 Royal Sun Properties, L.L.C., still owes petitioner                 
               13 The $750,000 includes reasonable compensation paid to Mr.           
          Reeves by petitioner and UMI together.  Respondent argued on                
          brief that if the Court accepted $750,000 as reasonable                     
          compensation for FYE June 30, 1996, it would be appropriate to              
          divide this amount between petitioner and UMI and allow                     
          petitioner to deduct $499,012.  Respondent alternatively argued             
          that it would be appropriate to allow UMI its full claimed                  
          deduction of $509,000 if petitioner were allowed only $250,000 as           
          reasonable compensation for its FYE June 30, 1996.                          

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