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expect that unrelated parties dealing at arm’s length would have
included a provision requiring periodic redetermination of the
pricing formula to allow for the future possibility that the
value of new reserves might outstrip the costs of finding and
developing them.
Second, when Tamma Hatten withdrew from and sold her
interests in the True companies pursuant to the buy-sell
agreements, it was clear that tax book value did not correspond
to the intrinsic value of some of the companies. For instance,
Eighty-Eight Oil, which was referred to as a “cash cow”, had
negative tax book value that required Tamma Hatten to offset the
sales proceeds to which she was entitled in order to sell her
interests. We would expect that unrelated parties dealing at
arm’s length would have re-evaluated the tax book value formula
price in light of these anomalous results, especially if the
agreements already had to be amended to reflect Tamma Hatten’s
withdrawal.
Petitioners argue that the lack of a periodic revaluation
provision is legally irrelevant because unanimous agreement was
required to amend the True companies’ buy-sell agreements.
Presumably, this means that the parties could always agree to
amend the formula price even absent a specific provision granting
revaluation authority. This argument ignores whether it was
reasonable for the True family not to reconsider the tax book
value pricing formula, given the actual and potential changes in
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