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valuation of the stock at book value of the assets by an income
capitalization method. Certainly, an appropriate income
capitalization method of valuation would be probative evidence.
The income capitalization method was recognized by both
petitioner's and respondent's experts to be properly based on the
operating income of a company divided by an appropriate
capitalization rate. While there are some differences between
the parties as to the capitalization rate, the major difference
is in a proper operating income. The books of SOAI were not
audited, and it is difficult to ascertain a proper operating
income from the records as kept.
The main adjustment made by petitioner's experts to
petitioner's income as reported to obtain an amount they
considered operating income was to add back to income part of the
officer's salaries paid and deducted, which they considered
excessive. Based on this adjustment, one of petitioner's experts
arrived at an operating income for 1981 of $215,000, which, when
divided by the capitalization rate used by that expert, resulted
in a value of the company on January 25, 1982, of approximately
its book value. Based on a study of other companies, one of
respondent's experts concluded that operating expenses would be
approximately 66 percent of revenues, and, therefore, the
operating profit would be approximately 34 percent of revenues,
or an amount for 1981 in excess of $500,000. Dividing this
computed operating income by the capitalization rate respondent's
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