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recognition for future years, calculating capital gains taxes
that will then be owed, and discounting those future tax
liabilities to their present value. The results of our
calculations are dependent on four independent variables: (1)
The rate at which Johnco's timber grows; (2) the effects of
inflation; (3) capital gains tax rates; and (4) the discount rate
employed. Each of the variables chosen for our calculations was
within the range of figures offered by the parties' experts.
Based on the testimony we received from Messrs. Elliott and
Baker, we think that a prospective purchaser of Johnco would
manage the Timber Property for sustainable yield by cutting an
amount of timber each year equivalent to that year's timber
growth. Mr. Elliot, who has had many years of involvement with
the Timber Property, testified that historically, the Timber
Property had produced annual growth of 8 to 10 percent.
Accordingly, for purposes of our calculations, we assume annual
timber growth to be 10 percent. In our calculations, we also
assume a 4-percent rate of inflation, based upon the 3- to-5-
percent, and 4-percent, estimates of Messrs. Buck and Lax,
respectively. As in effect on the valuation date, we assume a
34-percent capital gains tax rate under section 1201. Finally,
in selecting a discount rate for our equations, we assume a rate
of 20 percent and note that this in between the 17 to 22 percent
suggested by Mr. Lax and the 20 to 25 percent suggested by Mr.
Buck.
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