Estate of Richie C. Heck, Deceased , Gary Heck, Special Administrator - Page 8




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          respectively.  In his direct testimony, Dr. Spiro reached the               
          conclusion that the aggregate fair market value of the shares as            
          of the valuation date was $30,300,000, or $48,100 a share,                  
          rounded.2                                                                   
               In reaching his conclusion, Dr. Spiro utilized both a market           
          approach and an income approach, the latter of which is based               
          upon the discounted cashflow method.  He then applied to the                
          results under both approaches a 15-percent “liquidity discount”             
          and a 10-percent discount for “additional risks associated with S           
          corporations” including “the potential loss of S corporation                
          status and shareholder liability for income taxes on S                      
          corporation income, regardless of the level of distributions.”              
          He reconciled the two approaches by applying a 70-percent                   
          weighting factor to the “indicated value” of each share under the           
          income approach ($36,150) and a 30-percent weighting factor to              
          such value under the market approach ($65,209), resulting in a              


               2  The AVG report that constitutes Dr. Spiro’s direct                  
          testimony is dated Apr. 26, 2000.  The parties have stipulated,             
          and we have received into evidence, an earlier report from AVG to           
          respondent, dated Oct. 3, 1997, in which AVG concludes that the             
          fair market value of the shares on the valuation date was                   
          $30,177,000.  That value agrees with the value used by respondent           
          in preparing the notice of deficiency here in issue, but it is              
          lower than the value reached in the Apr. 26, 2000, report.  On              
          brief, respondent asks us to find that, on the valuation date,              
          the fair market value of the shares was $30,177,000.  We conclude           
          that respondent is not asking for any increased deficiency, even            
          though the report that constitutes  Dr. Spiro’s direct testimony            
          finds a slightly higher valuation of the shares.                            






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