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value is not particularly reflective of the fair market value of
HII stock. Although we agree with petitioners that the net asset
value is entitled to some weight in valuing HII, the net asset
value method in this case fails to identify other elements of
value in HII which we believe a hypothetical buyer and seller
would have considered as of the gift date. For example, we are
convinced that HII had a significant element of intangible value
in its goodwill.26
26“The essence of goodwill is a preexisting business
relationship founded upon a continuous course of dealing that can
be expected to continue indefinitely.” Canterbury v.
Commissioner, 99 T.C. 223, 247 (1992) (citing Computing &
Software, Inc. v. Commissioner, 64 T.C. 223, 233 (1975)). It is
the value of a trade or business that is attributable to the
expectancy of continued customer patronage. Boe v. Commissioner,
307 F.2d 339, 343 (9th Cir. 1962), affg. 35 T.C. 720 (1961); sec.
1.197-2(b)(1), Income Tax Regs. Respondent requests that we find
as fact, and petitioner agrees, that HII acquires its business on
the basis of bids without much continuing or recurring customer
relationships. Petitioners point to this requested finding and
suggest that HII did not have a significant amount of goodwill.
However, petitioners also argue in the context of the redemption
transaction, and Mr. Hess’s testimony makes clear, that HII had
established customer relationships through Mr. Kucklick, and Mr.
Kucklick could have exploited those relationships if he had left
HII. We find HII had a considerable element of goodwill or other
intangible value. See Rev. Rul. 59-60, sec. 4.02(f), 1959-1 C.B.
at 241:
While the element of goodwill may be based primarily on
earnings, such factors as the prestige and renown of
the business, the ownership of a trade or brand name,
and a record of successful operation over a prolonged
period in a particular locality, also may furnish
support for the inclusion of intangible value. * * *
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