Vitamin Village, Inc. - Page 18




                                       - 18 -                                         
          Method                                     FYE 1995   FYE 1996              
          Guideline cos. CEO compensation          $659,849   $755,309                
          Guideline cos. regression analysis       345,222    339,111                 
          Guideline co. percent of sales           887,641    409,323                 
          Guideline cos. net margins               2,150,000  1,500,000               
          Average of the methods                   1,010,678    750,936               
               The notice of deficiency allowed petitioner to deduct                  
          $1,044,809 and $367,382 as compensation to Mr. Reeves in the                
          fiscal years at issue, respectively.  Mr. Hakala’s report                   
          concluded the maximum reasonable compensation payable to Mr.                
          Reeves in the years at issue was $1 million and $750,000,20                 
          respectively.21                                                             
               On cross-examination, Mr. Hakala conceded he was unable to             
          consider all the facts and circumstances needed to conduct a                
          comprehensive analysis because his financial review was limited             
          to petitioner’s revenue and net income from FY 1985 through FY              
          1994 and petitioner’s tax returns for the years at issue.  He               
          testified that additional information could have made a material            
          impact on his conclusions.22                                                



               20 See supra note 13.                                                  
               21 Mr. Hakala’s reasonable compensation determinations for             
          the years at issue were the rounded averages of figures computed            
          by applying the four methods to the guideline companies’                    
          financial information.  See table supra p. 18.                              
               22 In Mr. Hakala’s report and at trial, he stated that he              
          reserved the right to amend the report to reflect consideration             
          of additional information.                                                  





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