Vitamin Village, Inc. - Page 24

                                       - 24 -                                         
          petitioner’s shareholders return on equity increased to 93                  
          percent and 25 percent in the fiscal years at issue,                        
          respectively.  These percentages were also substantially higher             
          than the guideline companies’ average, as discussed below.                  
               Although petitioner’s business may not have been a complex             
          operation, this Court does not consider it to have been a simple            
          task for Mr. Reeves to operate petitioner as its sole executive             
          and manager.  Neither petitioner’s sales nor its gross profits              
          could have been attained but for the personal skills of Mr.                 
               D. Conflict of Interest                                                
               This factor examines whether a relationship exists between             
          the company and the employee which may permit the company to                
          disguise nondeductible corporate distributions as section                   
          162(a)(1) compensation payments.  Close scrutiny may be used when           
          the paying corporation is controlled by the compensated employee,           
          as in the instant case.  Elliotts, Inc. v. Commissioner, supra at           
          1246-1247.  However, the mere fact that the individual whose                
          compensation is under scrutiny is the sole shareholder of the               
          company, even when coupled with an absence of dividend payments,            
          “does not necessarily lead to the conclusion that the amount of             
          compensation is unreasonably high.”  Id. at 1246.                           
               The Court of Appeals for the Ninth Circuit formulated the              
          inquiry by evaluating the compensation payments from the                    

Page:  Previous  17  18  19  20  21  22  23  24  25  26  27  28  29  30  31  Next 

Last modified: November 10, 2007