- 39 -
calculate beta is a significant shortcoming in the use of the
CAPM to value a closely held corporation. See Furman v.
Commissioner, supra. Mr. Mitchell did not provide support for
the amount of the additional risk premium, other than citing the
source of the amount used, and he simply assumed a beta equal to
market risk. In the instant case, respondent has failed to
provide the evidence necessary for us to determine whether use of
CAPM was appropriate, and whether the figures used in his
calculations were reliable. See, e.g., Estate of Klauss v.
Commissioner, supra; Estate of Maggos v. Commissioner, supra;
Estate of Hendrickson v. Commissioner, supra; Furman v.
Commissioner, supra.
Respondent’s valuation determination was also unclear in
another aspect. Mr. Mitchell subtracted intercompany profits
only for 1993 when determining WLI’s earnings.34 Mr. Mitchell
stated that he was being conservative with respect to the net
earnings of WLI for 1993 and that is why he subtracted the
intercompany profits. Mr. Mitchell explained that it was
appropriate to subtract the intercompany profits for 1993
because, for financial reporting purposes, the activities of WLI
were combined with other entities having common ownership while
34Mr. Mitchell testified that he did not know for a fact
that the approximately $250,000 in intercompany profits should be
subtracted from WLI’s earnings but that he went ahead and did it
to be conservative.
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