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have just recited, could serve only to decrease the market value of
the interest for sale.
Also important is that the conditions under which petitioner had
operated during the 1970's had changed in the 1980's, when Pillsbury
acquired H�agen-Dazs, with the avowed goal of distributing ice cream
to supermarkets itself rather than relying on independent distributors
such as petitioner--a fact well known at the time of the redemption of
Arnold’s stock in MIC. These changed conditions render suspect any
fair market value based on past earnings.
Most importantly, petitioner’s earnings in the years preceding
the split-off were substantially attributable to Arnold’s oral
agreement with Mr. Mattus and his relationship with the supermarkets.
As we have found, the supermarket distribution rights were personal to
Arnold and did not belong to petitioner. The assumption underlying a
capitalization of earnings approach is that, barring adverse
developments, the historical earnings will continue. Therefore, in
valuing petitioner as of the time of the split-off, which marks the
parting of the ways between petitioner and Arnold, an adverse
development indeed, it makes no sense to assume that petitioner’s
earnings would continue at the same level in the future, or even that
there would be no more than a pro rata reduction of such earnings by
reason of Arnold’s departure.
Under the circumstances of this case, where there was a heavy
investment in physical assets during a period when the corporation had
been unable to pay dividends, an absence of a second tier of
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