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value by 34 percent of Dunn Equipment’s built-in capital gains.9
Respondent challenges both of these positions.
In calculating net asset value, Mr. Frazier adjusted the
underlying asset values shown on the balance sheet of Dunn
Equipment as follows: (i) By allocating no value to prepaid
expenses of $52,643 and prepaid interest of $671,260 and (ii) by
reducing total asset value by 34 percent of Dunn Equipment’s
built-in capital gains on underlying assets to account for
potential capital gains tax liability.10 Mr. Frazier’s estimated
net asset value for the entire company, before any reduction for
potential tax liability, was $7,519,439. Further, he calculated
the built-in capital gains in Dunn Equipment’s assets to be
$7,109,000.
There is no question that the prepaid expenses and interest
would be valuable to the buyer of Dunn Equipment who intended to
continue to operate the company. In such a case, as the expenses
and interest came due, the company would not be required to make
9 Dunn Equipment owned property as well as equipment. It
appears that the proceeds from the sale of the equipment would
have resulted in ordinary income rather than capital gains. See
sec. 1245. None of the parties or their experts addressed this
point. However, Mr. Frazier used a 34-percent rate for both
ordinary income and capital gains, which appears to be the
correct result under secs. 11 and 1201. Thus, for our purposes
it is irrelevant whether the proceeds resulted in ordinary or
capital gain.
10 Respondent also challenges petitioner’s failure to
include the value of a $35,000 townhouse in asset value.
Petitioner concedes this point.
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