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measure of useful life since the Rose customers were to be
integrated into petitioner’s business environment.21
Mr. Knoblick then focused on Rose’s annual revenues from
cash and margin accounts, which were determined to be $6,183,294
and $6,765,276, respectively. Those amounts were adjusted to
account for petitioner’s revenue growth by employing a 12-percent
increase over each 4-year period. This 12-percent adjustment was
based on petitioner’s actual financial performance. Thereafter,
pretax earnings were determined by applying the pretax profit
margins petitioner used in its evaluation of the Rose business
entity at the time of purchase. The use of petitioner’s pretax
profit margins accounted for capital burden, including the fixed
and overhead costs of servicing the acquired Rose accounts.
Applying a 34-percent Federal tax rate, Mr. Knoblick derived an
after-tax income stream. He then applied a 16-percent discount
in order to determine the present value of the income stream.
Mr. Knoblick’s use of the 16-percent discount was based on its
use by petitioner’s acquisition team in their pre-purchase
analysis of Rose. Using that methodology, the fair market values
of Rose’s cash and margin customer accounts were determined to be
$4,130,000 and $6,711,000, respectively.
21 Petitioner followed the procedures for useful life set
forth in sec. 1.167(a)-1(b), Income Tax Regs., as more fully
discussed later in this Opinion in the section addressing useful
life.
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