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limitations of the various classes of stock must be considered in
making valuation determinations. See Estate of Newhouse v.
Commissioner, 94 T.C. 193, 218 (1990); Estate of Anderson v.
Commissioner, T.C. Memo. 1988-511. The factors to be considered
are those that an informed buyer and an informed seller would
take into account. See Hamm v. Commissioner, 325 F.2d 934, 940
(8th Cir. 1963), affg. T.C. Memo. 1961-347.
Respondent relied on his appraiser, Mr. Mitchell, who valued
WLI using a capitalized income analysis. The key components
under Mr. Mitchell’s capitalized income analysis were: (1) The
determination of a reasonable level for net profits or net cash-
flow; (2) an appropriate cost of capital; and (3) a reasonable
rate of growth for the profit stream. Mr. Mitchell relied on
relevant financial information of WLI for 1991, 1992, and 1993,
to determine the value of the WLI stock.
Mr. Mitchell examined the revenues and expenses associated
with WLI’s operations for the years 1991, 1992, and 1993, and,
after averaging the 3 years, he concluded that a reasonable level
for net profits or net cash-flow, before tax, was $630,000. In
order to reach this conclusion, Mr. Mitchell adjusted WLI’s
earnings for 1993 to reflect intercompany transactions with SCC,
but he did not adjust WLI’s earnings for 1991 or 1992 to account
for intercompany transactions with SCC and affiliates.
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