- 32 -
discount rate to the sustainable profits resulted in a fair
market value for Schlegel GmbH of $2.6 million.
Valuation Analysis and Conclusions
Petitioner argues that we should value the subject companies
using an asset valuation method; however, in valuing the stock of
operating companies, primary consideration is generally given to
the earnings of the company. See Estate of Huntsman v.
Commissioner, 66 T.C. 861, 876 (1976) (citing Levenson’s Estate
v. Commissioner, 282 F.2d 581, 586 (3d Cir. 1960), affg. on this
issue T.C. Memo. 1959-120); see also Rev. Rul. 59-60, 1959-1 C.B.
237, 242. Asset valuation is accorded the greatest weight in
valuing the stock of a holding company. See Levenson’s Estate v.
Commissioner, supra at 586. Schlegel UK and Schlegel GmbH are
operating companies, and the experts in this case focused on the
earning potential in arriving at fair market value. The experts
also indicated that the asset methodology is inappropriate
because it undervalues the subject companies. Accordingly, we
focus on the earning power to arrive at fair market value, giving
little weight to the value of the assets of the companies.
We focus initially on whether Schlegel UK should be valued
as a stand-alone entity or as an entity likely to be acquired by
a company with synergies. Button valued Schlegel UK on a stand-
alone basis because he was of the opinion that no synergistic
buyer was available for Schlegel UK. Gooch considered the
Page: Previous 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 NextLast modified: May 25, 2011