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measured based on realized income and not on unrealized
appreciation of the business assets. Respondent points out that
petitioner’s percentage return is due to unrealized appreciation
on marketable securities and estimated average appreciation on
the leased Green Valley Ford property. In addition, respondent
notes that petitioner did not factually establish that the real
property had appreciated to the extent claimed. Significantly,
there has been no showing that any portion of the claimed asset
appreciation was due to the Valentes’ efforts rather than general
market conditions.
We cannot accept the inherent premise of petitioner’s
approach; i.e., that an independent investor would be satisfied
with little or no return on petitioner’s current income stream
that was being generated with little effort on the part of
petitioner’s officers. Petitioner’s approach also assumes that
an independent investor would forgo an established stream of
income cash-flow return on equity for the possibility that
unrealized asset appreciation will be available in the future.
To some extent, an independent investor might invest in an entity
for the possibility of asset appreciation. That investor,
however, would not, without some compelling reason, forgo the
income stream from those assets. That is especially true where,
as here, the Valentes’ efforts were, in great part, directed at
the maintenance, as opposed to the creation of the income stream.
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