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Petitioner, however, argues that because of the ongoing
litigation over issuance to 2618 Inc of the mixed beverage and SB
permits, the stock of 2618 Inc had no value when he received the
stock in 1988. Petitioner argues that the possibility was high that
the Club would be required to close as a topless dance club and
that that possibility eliminated any future income and goodwill value
associated with the Club's operations and with the stock of 2618 Inc.
Petitioner did not call an expert witness with regard to the value of
the stock of 2618 Inc.
As explained, in the notice of deficiency for 1988, respondent
determined that the stock of 2618 Inc had a value of $1.5 million
when petitioner received it. At trial, respondent's expert used a
discounted cash-flow analysis and arrived at alternative values for
the stock of 2618 Inc. Assuming that the Club would receive an SB
permit and continue operating indefinitely beyond the projected March
31, 1990, termination date, respondent’s expert first valued the
stock at $1,140,000. In the alternative, assuming that the Club
would not receive an SB permit and would be required to close as of
March 31, 1990, respondent’s expert valued the stock of 2618 Inc at
$230,000. Both of the valuations of respondent's expert assume that
the Club would operate with mixed beverage permits.
The evidence establishes that on September 20, 1988, petitioner
received all the outstanding stock of 2618 Inc, not in a legitimate
purchase transaction, but in payment of the over $500,000 in legal
fees owed to petitioner by 2618 Inc and by Helmle. In the months
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