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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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