Vitamin Village, Inc. - Page 14

                                       - 14 -                                         
          When shareholder-officers who control the corporation set their             
          own compensation, careful scrutiny is necessary to determine                
          whether the alleged compensation is in fact a distribution of               
          profits and a constructive dividend.  Home Interiors & Gifts,               
          Inc. v. Commissioner, 73 T.C. 1142, 1156 (1980).                            
          II. The Elliotts Factors Applied to Petitioner’s Compensation of            
               Mr. Reeves                                                             
          A. Role in the Company                                                      
               The role the employee plays in the company focuses on the              
          employee’s importance to the success of the business.  Pertinent            
          considerations include the employee’s position, hours worked, and           
          duties performed.  Elliotts, Inc. v. Commissioner, supra at 1245.           
               From petitioner’s incorporation in 1979, Mr. Reeves’s hard             
          work and vision were critical and indispensable to petitioner’s             
          business and the primary reason for its overall success.  He                
          served as petitioner’s president from its incorporation in 1979             
          and its secretary and treasurer from 1986.  Mr. Reeves also                 
          handled all of petitioner’s managerial duties.  On a daily basis            
          he managed petitioner’s research, development, production, sales,           
          and marketing and advertising (until UMI was spun off on June 1,            
          1995).  Mr. Reeves also supervised petitioner’s employees15 and             
          was responsible for all hiring and firing.                                  

               15 Mr. Reeves testified that petitioner had approximately 25           
          employees during the fiscal years at issue.                                 

Page:  Previous  7  8  9  10  11  12  13  14  15  16  17  18  19  20  21  Next 

Last modified: November 10, 2007