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2. Deriving a Capitalization Rate
Shriner derived a capitalization rate of 20.53 percent from
his estimated discount rate and from his estimated future average
annual growth rate of 6.34 percent for WSA.6 Respondent does not
dispute Shriner’s estimated growth rate or capitalization rate.
We accept Shriner’s estimate of a capitalization rate of 20.53
percent. However, we do not accept an increase that Shriner made
to that rate for reasons discussed next.
3. Whether Shriner Properly Converted the Capitalization
Rate From an After Corporate Tax Rate to a Before
Corporate Tax Rate
The net cashflow and the capitalization rate used to compute
the fair market value of the WSA stock should have the same tax
character; i.e., before corporate tax or after corporate tax.
See Gross v. Commissioner, T.C. Memo. 1999-254 (both the discount
rate and cashflow should be before shareholder tax or after
shareholder tax), affd. 272 F.3d 333 (6th Cir. 2001). See
generally Black & Issom Associates, Fundamentals, Techniques and
Theory of Capitalization/Discount Rates, ch. 5, at 23 (1995);
Ibbotson Associates, Stocks, Bonds, Bills and Inflation:
Valuation Edition 1999 Yearbook; Pratt, supra at 151-152, 155.
6 The capitalization rate is generally derived by reducing
the discount rate by the expected long-term stable growth rate of
net cashflows to the investment being valued. Pratt, supra at
21-23.
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