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negatively affects petitioner’s fair market value.31
Under the circumstances of this case, use of book value would
tend to overvalue petitioner, especially in light of the effect of the
relatively low--and dropping--ratio of net income to sales during the
mid-1980's on the value of petitioner and the relative lack of
dividend-paying capacity, which shows the precarious nature of
petitioner’s financial health. Capitalized earnings at a 6.25:1
price/earnings ratio, $331,394, also over- values petitioner to the
extent that it does not sufficiently take into account a number of
other factors not fully considered by Mr. Bergwerk.
Although Mr. Bergwerk discussed petitioner’s overreliance on
H�agen-Dazs as its major supplier, he did not expressly take into
account the negative effect on marketability--and hence fair market
value--of H�agen-Dazs’ effective veto over any sale to an unrelated
third party. Because of the tenuous nature of petitioner’s
distribution rights--if any--to H�agen-Dazs products, H�agen-Dazs
could effectively stop a sale of petitioner, if it did not approve of
the buyer, by threatening to stop supplying petitioner with its
product. The withdrawal of H�agen-Dazs as a supplier would leave
31 Using the formula used in Bardahl Manufacturing Corp. v.
Commissioner, T.C. Memo. 1965-200, which calculates the amount
available for dividends as the working capital at year’s end less
necessary working capital and capital expenditures actually made
in the following year, petitioner was insufficiently capitalized
in the years immediately preceding the separation of the business
lines. Necessary working capital was determined as a function of
working capital requirements for the year and the length of
petitioner’s operating cycle, which is determined by inventory
and accounts receivable turnover and the credit period extended
by suppliers--primarily H�agen-Dazs.
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