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Under item (2), we must consider whether disparities (at the
interest owner’s death) between the fair market value of
unrestricted interests and the buy-sell agreement’s formula price
could have been predicted by the parties at the time the
agreements were executed. See Estate of Reynolds v.
Commissioner, 55 T.C. at 194.
Certain facts indicate that the True companies’ tax book
value formula price was lower than the formula price that would
have been negotiated by unrelated parties dealing at arm’s
length. For instance, petitioners concede that tax book value
does not reflect the fair market value of underlying assets.
They justify this disparity by saying that value should not be
determined on a company-by-company, liquidating basis, but
instead on an aggregate, going concern basis. Thus, petitioners
contend that the value of True Oil’s proven oil and gas reserves
was properly omitted from the tax book value pricing formula
because the reserves essentially were purchased with earnings
from the other True companies and their value likely would be
dissipated in the unsuccessful search for replacement reserves.
We find it unreasonable to assume that Dave True, in a comparable
situation with unrelated parties, would have agreed to a formula
price that assumed that the value of True Oil’s reserves would be
expended indefinitely on dry holes resulting from unsuccessful
efforts to locate additional reserves.
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