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testimony from respondent.
Of the three valuation factors used by Mr. Bergwerk, the highest
amount was book value as of October 31, 1987, $552,061.29 In
calculating the capitalized earnings of petitioner at $331,394, Mr.
Bergwerk estimated the earning capacity of petitioner as $53,023 per
year after taxes, based on a weighted average of the 5 years of
operations ending on October 31, 1987,30 and a price-earnings ratio of
6.25:1, the same as used by this Court in Estate of Little v.
Commissioner, T.C. Memo. 1982-26, to determine the value of a closely
held, diversified corporation engaged in light manufacturing. Mr.
Bergwerk discounted the price-earnings ratio because of the corporate
shortcomings noted above, the dependence of the business on Arnold’s
personal relationships with the supermarkets, and the lack of a second
tier of management.
Mr. Bergwerk opined that the corporation had no goodwill because
the rate of return on tangible assets did not exceed 10 percent, a
rate of return on tangible assets suggested by Rev. Rul. 68-609, 1968-
2 C.B. 327. Under the approach of Rev. Rul. 68-609, supra, any return
in excess of 10 percent would be attributable to goodwill or other
intangibles for tax purposes. See also Financial Valuation:
Businesses and Business Interests, par. 16.4[7], at 16-10 (Zukin ed.
29 Mr. Bergwerk estimated the book value as $554,061 in the
text of his report and $552,061 in the exhibit. The exhibit
corresponded to the book net worth shown in the tax balance sheet
in petitioner’s 1987 tax return.
30 Petitioner’s net income rose from $40,873, or 0.0081
percent of gross sales, in 1983, to $55,914, or 0.0066 percent of
gross sales, in 1987.
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