- 41 -
financial information in purchasing stock of a company. However,
we also believe that a hypothetical buyer would consider a
company’s historical earnings placing greater emphasis on
relevant information from the more recent years. This is
especially true of companies, such as HII, which are in cyclical
industries and use the completed contract method of accounting.
In these circumstances, the use of longer periods of time or
averages over “a peak to trough sort of cycle” would seem
preferable. Thus, we agree with petitioners that reliance solely
on financial information for one particular year might overstate
the fair market value of stock in a company. At the same time,
reliance on more recent financial information might be justified
in certain circumstances.38 For example, Mr. Engstrom testified:
38We also point out that Rev. Rul. 59-60, sec. 4.02(d),
1959-1 C.B. at 241, states on the subject of future earning
power:
Potential future income is a major factor in many
valuations of closely-held stocks, and all information
concerning past income which will be helpful in
predicting the future should be secured. Prior
earnings records usually are the most reliable guide as
to the future expectancy, but resort to arbitrary five-
or-ten-year averages without regard to current trends
or future prospects will not produce a realistic
valuation. If, for instance, a record of progressively
increasing or decreasing net income is found, then
greater weight may be accorded the most recent years’
profits in estimating earning power. * * *
Rev. Rul. 59-60, supra, “has been widely accepted as setting
forth the appropriate criteria to consider in determining fair
market value”. Estate of Newhouse v. Commissioner, 94 T.C. at
(continued...)
Page: Previous 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 NextLast modified: May 25, 2011