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way. Accordingly, respondent is not estopped from disregarding a
fictitious corporate tax when valuing an S corporation.
C. Mr. McCoy’s Testimony
Mr. McCoy lists eight costs or tradeoffs shareholders incur
as a result of electing to be taxed as an S corporation. The
enumerated costs or tradeoffs highlight three areas of concern,
which "tax-affecting" is directed to address. First, Mr. McCoy
addresses the possibility that, if an S corporation distributes
less than all of its income, the actual distributions might be
insufficient to cover the shareholders' tax obligations. As a
theoretical matter, we do not believe that "tax-affecting" an
S corporation's projected earnings is an appropriate measure to
offset that potential burden associated with S corporations. In
any event, we do not think it is a reasonable assumption that G&J
would not make sufficient distributions to cover its
shareholders' tax liabilities. G&J had a strong growth record
and a history of making cash distributions to shareholders that
nearly equaled its entire income. Petitioners have not convinced
us that it would be reasonable to assume G&J would not continue
this practice.
Second, Mr. McCoy addresses the risk that an S corporation
might lose its favorable S corporation status. We might consider
an approach that sought to determine the probability of such an
occurrence, and which utilized a tax rate equal to the product of
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