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its 1995 fiscal year. Since we conclude that this adjustment
should not have been made, Mr. Heebink’s valuation analysis
significantly understates the value of HII stock.
For HII’s 1995 fiscal year, Mr. Heebink adjusted HII’s cost
of sales upward and thus its earnings figures downward by
approximately $2.5 million. He used this adjusted cost of sales
in developing his cost of sales assumption for his discounted
cashflow analysis and the adjusted earnings amount in his market
comparable analysis. This adjustment was made on the basis of
information contained in a 1997 memorandum from personnel at HII
to Mr. Heebink regarding a purported overstatement of 1995 income
attributable to an alleged understatement of reserves for
expenses associated with machine construction projects for 1995.
We cannot agree that Mr. Heebink properly adjusted earnings to
account for the alleged understatement.
Petitioners have not established the existence of an
understatement of reserves for 1995, the nature of the
understatement, or its amount. We cannot conclude from the
evidence presented that a hypothetical buyer or seller would have
discovered, or even considered, the understatement of reserves in
1995, at the time of the gift. Indeed, the 1997 memorandum from
HII personnel that Mr. Heebink relied upon in making the
adjustment states rather equivocally:
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