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value of $4.6 million for all of petitioner's stock as of that
date, Mr. Reilly calculated that the average annual after-tax
return over the 11-year period was 27.57 percent.
We question Mr. Reilly's use of $315,766 as the value of the
stockholders' initial capital investment on October 31, 1986.
The purchase of Clifford's shares of stock was not the result of
an arm's-length negotiation and was made in conjunction with
Dennis' transfer of 25 percent of his stock to Curtis and with
the gratuitous transfer of Clifford's interest in Wagner & Wagner
to Dennis and Curtis.
We also give little weight to the use of the purchase price
Dennis paid to Curtis for his 25 percent of petitioner's stock in
November 1997. The sale occurred after the years in issue, and
the full terms of the purchase are not in evidence.5
2. John M. Lacey
Respondent offered the report and testimony of John M.
Lacey, Ph.D. (Dr. Lacey), to establish that petitioner's return
on equity for 1995 and 1996 was not comparable to that of the
industry and would not meet a reasonable investor's expectations,
and to establish that petitioner did not fairly distribute its
earnings between management and stockholders.
5At trial, petitioner objected in another context to the
admission of facts related to events occurring after the years
before the Court.
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