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assumed that the hypothetical buyer is taxable at rates
consistent with those used in Lipscomb’s after-tax analysis.19
Accordingly, we reject respondent’s suggestion that in
determining the present value of a projected income stream for
gift tax purposes, the determination must as a matter of law be
made on a pretax basis.
Given Lipscomb’s assumed 35-percent tax rate, his 8-percent
after-tax discount rate may be converted to a pretax discount
rate of approximately 12.3 percent (8 divided by (1.0-.35)),
which is very close to the 12.5-percent pretax “basic rate”
selected by Dilmore for use in his pretax analysis. In the
instant circumstances, the critical question, we believe, is not
whether to use a pretax or after-tax analysis, but whether it is
more appropriate to apply the pretax discount rate selected by
Maloy (8 percent), or by Dilmore (13.5 percent), or the
equivalent pretax discount rate selected by Lipscomb (12.3
percent).
19 Maloy’s report indicates that, on the basis of his
research, yield rates associated with investments like the
subject lease range from 6 to 8 percent, with the lower yields
more likely associated with investors who are tax-exempt. Maloy
selects an 8-percent rate associated with taxable investors.
Moreover, an 8-percent rate is approximately 33 percent higher
than the 6-percent rate that he associates with tax-exempt
investors, implying a 33-percent tax rate, which coincides
roughly with the 35-percent tax rate that Lipscomb assumes in his
analysis.
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