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The Court: Um-hmm.
Mr. Wilhoite: But every dollar of earnings for
G&J, in any particular year, has to go to the IRS.
Whether it goes through the shareholders or directly,
it has to go to the IRS.
So, what’s left above the tax that they’re paying
to the IRS is the true distribution to the shareholder,
and also represents the true available cash that the
company can distribute.
It is possible that Mr. Wilhoite is arguing that, in valuing
an S corporation, the avoided C corporation tax must be taken
into account as a hypothetical expense, in addition to the
shareholder level taxes actually imposed on the S corporation’s
shareholders. Indeed, that is the position taken by Mr. McCoy.
Mr. Wilhoite has failed to convince us, however, that Dr. Bajaj
should have applied a hypothetical corporate tax rate in excess
of the zero-percent actual corporate tax rate he did apply. He
has not convinced us that such an adjustment is appropriate as a
matter of economic theory or that an adjustment equal to a
hypothetical corporate tax is an appropriate substitute for
certain difficult to quantify disadvantages that he sees
attaching to an S corporation election. We believe that the
principal benefit that shareholders expect from an S corporation
election is a reduction in the total tax burden imposed on the
enterprise. The owners expect to save money, and we see no
reason why that savings ought to be ignored as a matter of course
in valuing the S corporation.
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