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Hungate assumed that the fair market value of the covenants
not to compete is the sum of the present value of lost cash-flow
that would occur if there were no covenants not to compete and
tax savings from amortizing the value of the covenants. He
computed the lost cash-flow by analyzing the volume of timber
available to petitioner. Hungate estimated that petitioner could
buy 14 percent more timber with the covenants not to compete. He
believed that petitioner's cash-flow would have been cut by about
15 percent if the Walkers could compete. He computed the present
value of that amount and divided it by 3 because he believed that
there was a one-third chance that D.C. Walker would have competed
against petitioner if there had been no covenant. He calculated
the tax savings and added that amount to the lost cash-flow
total. He concluded that the covenants not to compete had a fair
market value of $403,000 on March 1, 1988.
We have very little confidence in Hungate's value of the
covenants not to compete. We are not convinced that there was
only a one-third chance that D.C. Walker would compete without a
covenant not to compete. Hungate ignored significant facts. One
of the primary reasons that petitioner wanted the covenants not
to compete was to eliminate the Walkers from bidding on timber.
Hungate ignored this fact. On several occasions, D.C. Walker bid
a Forest Service sale to an inflated level, then dropped out,
leaving petitioner to buy the timber at a higher price. Hungate
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