-23-
find that it was. The value of Crossroads' assets increased from
about $4.6 million in 1987 to nearly $50 million in 1993, a
tenfold increase. Crossroads' net income increased from about
$430,000 in 1987 to $4.6 million in 1993, with an average net
income of about $2.5 million from 1987 to 1993. We find
Gallagher's assertion that Crossroads' stock was worthless as of
January 1, 1992, to be unlikely in view of the fact that
Crossroads was highly profitable and had not showed a loss since
1987.
3. Wise
Wise's appraisal was based on assumptions that we believe
were inaccurate. Wise reduced Crossroads' reserves for unpaid
losses by 30 percent. He said he based this on an industry
standard, but he provided no source or other basis to justify
this adjustment. Respondent argues that Wise's reduction of
Crossroads' reserves was justified because Crossroads did not
discount its reserves for the time value of money. We disagree.
As discussed above at paragraph II-C-1, Wise did not reduce
Crossroads' reserves for the time value of money. Thus,
respondent's theory is a belated attempt to bolster Wise's
arbitrary reduction of Crossroads' reserves.
Wise used the price/earnings and book value methods this
Court used in Estate of Feldmar v. Commissioner, supra. However,
Wise misapplied the price/earnings capitalization rate of five
Page: Previous 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 NextLast modified: May 25, 2011