Vitamin Village, Inc. - Page 19

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               Mr. Hakala admitted that there were six circumstances not              
          considered in his report that could affect his findings in                  
          petitioner’s favor.  First, he stated that an employee who serves           
          in multiple positions within a company may be compensated at a              
          higher level to reflect the additional duties and                           
          responsibilities.  He recognized that unlike the CEOs of the                
          guideline companies, Mr. Reeves served in all of petitioner’s               
          executive and managerial roles.  Consequently, his compensation             
          should reflect the combined salaries of the positions he held.              
          See Elliotts, Inc. v. Commissioner, 716 F.2d at 1246.23                     
               Second, Mr. Hakala testified that typically an employee of a           
          company like petitioner that has variable performance years and             
          who is underpaid during those years is compensated at a higher              
          amount in profitable years to make up for the lower income                  
          years.24  In addition, when the employee is reimbursed at a later           
          date, the time value of money is often considered in increasing             
          compensation.  Mr. Hakala’s report did not take into account that           
          in some of the years before the fiscal years at issue petitioner            
          either underpaid Mr. Reeves or did not pay him at all.                      

               23 The average combined executive salaries for the five                
          guideline companies during the fiscal years at issue were                   
          $1,019,418 and $1,124,167, respectively.                                    
               24 Mr. Hakala stated that the common way to compensate                 
          employees in businesses with volatile performance is through a              
          compensation plan that pays a fixed salary, with a bonus during             
          good years and no bonus during years in which performance is                

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Last modified: November 10, 2007