Estate of Helen J. Smith, Deceased, Frederic L. Foill II and Cassandra F. Vallery, Co-Executors - Page 14




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          on its face; by the same argument, the disparity demonstrates               
          that only an earnings-based value should be used.  Respondent               
          also argues that as an investment, JFI was valuable only for the            
          potential appreciation of assets rather than for the stream of              
          income.  Respondent bases this argument in part on JFI’s policy             
          of paying dividends only in amounts sufficient to meet the tax              
          liability it generated as a subchapter S corporation for its                
          shareholders.  We note, however, that the regulations point to              
          “prospective earning power and dividend-paying capacity”, rather            
          than actual dividends paid, as an indicator of value.  Sec.                 
          20.2031-2(f)(2), Estate Tax Regs. (emphasis added).  Further, the           
          farm manager’s compensation was based in part on a share of JFI’s           
          profits, weakening any suggestion by respondent that JFI’s                  
          earnings were artificially low.                                             
               As for lack of marketability, respondent does not dispute              
          Mr. Egan’s use of a 35-percent discount.  As will be seen below,            
          respondent’s expert, Mr. Keath, applied a lack of marketability             
          discount of 36.8 percent.                                                   
               Expert Opinion of Mr. Hitt                                             
               Mr. Hitt also valued JFI using an asset-based method and an            
          earnings-based method.                                                      











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