Vitamin Village, Inc. - Page 13

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               Section 162(a)(1) permits a taxpayer to deduct “a reasonable           
          allowance for salaries or other compensation for personal                   
          services actually rendered”.  A taxpayer is entitled to a                   
          deduction for compensation only if the payments were reasonable             
          in amount and in fact paid purely for services.  Sec. 1.162-7(a),           
          Income Tax Regs.14  Although framed as a two-prong test, the                
          inquiry under section 162(a)(1) generally turns on whether the              
          amounts of the purported compensation payments were reasonable.             
          Elliotts, Inc. v. Commissioner, 716 F.2d 1241, 1245 (9th Cir.               
          1983), revg. T.C. Memo. 1980-282.  Petitioner has the burden of             
          proving the payments to Mr. Reeves were reasonable.  See Rule               
              Because petitioner’s place of business is in the State of              
          Oregon, absent stipulation otherwise, an appeal of this case                
          would go to the Court of Appeals for the Ninth Circuit.  See sec.           
          7482(b)(1)(B).  That Court of Appeals uses five factors to                  
          determine the reasonableness of compensation, with no single                
          factor being determinative.  Elliotts, Inc. v. Commissioner,                
          supra.  The factors are:  (1) The employee’s role in the company;           
          (2) comparison with other companies; (3) the character and                  
          condition of the company; (4) potential conflicts of interest;              
          and (5) internal consistency in compensation.  Id. at 1245-1248.            

               14 Respondent argues only that the amount of compensation              
          was unreasonable.                                                           

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