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87 T.C. 78, 102 (1986); Estate of Ford v. Commissioner, T.C.
Memo. 1993-580, affd. 53 F.3d 924 (8th Cir. 1995). IHC was
clearly the former.
Petitioner also attacks the methodology of respondent’s
expert’s discounted cash-flow analysis. Specifically, petitioner
criticizes respondent’s expert’s assumption of a pretax profit
margin of 3.1 percent, when IHC’s actual pretax profit margin
averaged 2.0 percent for the 5-year period 1988-92. Challenged
to explain the 1.1-percent discrepancy at trial, respondent’s
expert contended that the difference was attributable to the
upward adjustment in earnings he made to account for excessive
compensation paid to Mr. Rakow and petitioner during the period.
We believe respondent’s expert was mistaken in his testimony.
His report makes no mention of excessive compensation. A review
of his report suggests that the 1.1-percent difference between
the 2.0 actual average pretax profit margin and the 3.1 pretax
profit margin assumed in the discounted cash-flow analysis is
attributable to--
(i) respondent’s expert’s selection of a direct
cost percentage of 88.0 percent, rather than the actual
5-year average of 88.7 percent (for a difference of 0.7
percent); plus
(ii) respondent’s expert’s selection of a
percentage for operating expenses (minus depreciation)
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