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continuously had to replace its equipment and spent an average of
$2 million per year for such replacements. Also, direct
operating expenses increased significantly in 1988 as Dunn
Equipment began to rent equipment from third parties when its own
equipment was leased out. The company would only break even on
these rentals. Direct operating expenses continued to increase
from 42 percent in 1988 to 52 percent in the 12-month period
ending May 31, 1991.
Dunn Equipment did not pay any dividends from 1987 through
1991. As of the valuation date, there was no public market, or
recent private transactions, in the stock of Dunn Equipment and
no current or pending litigation that could have had a material
adverse effect on its value.
OPINION
The issue in this case is the fair market value, for Federal
estate tax purposes, of decedent’s 62.96-percent share of stock
in Dunn Equipment on June 8, 1991, the valuation date. In the
Federal estate tax return, decedent’s shares in Dunn Equipment
were valued at $3.32 per share, for a total amount of $1,635,465
at her date of death. In the notice of deficiency, respondent
determined that the fair market value of decedent’s Dunn
Equipment stock at such time was $2,229,043. Subsequently, by
amendment to answer, respondent claimed a value for the stock of
$4,430,238, which resulted in an increase in the deficiency of
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