-80-
the numerator of which is the total number of days over which the
discount is compounded and the denominator of which is 365.
C. 4 Percent Discount Rate
In Trompeter I, we applied in our methodology a 4-percent
discount rate to ascertain the discounted value on September 18,
1992, of each of the redemption payments which Sterling was
obligated to pay as of the three referenced dates after
September 18, 1992. The Court of Appeals for the Ninth Circuit
questioned whether a 4-percent discount rate accurately reflects
the risk that Sterling would not have redeemed its series A
preferred stock as required by the certificate of designation.
According to the Court of Appeals for the Ninth Circuit: “it
seems a bit of a stretch to conclude that a buyer would have
accepted a discount rate of only four percent to account for the
time value of money and the risk that Sterling would not meet its
contractual obligations.” Estate of Trompeter v. Commissioner,
279 F.3d 767, 773 (9th Cir. 2002) (emphasis added), vacating and
remanding T.C. Memo. 1998-35, supplemented by 111 T.C. 57 (1998).
Our 4-percent discount rate did not reflect the risk that
Sterling would fail to meet its contractual obligations but
reflected only the time value of money; i.e., the fact that one
dollar to be received in the future is not worth one dollar
today. We believe that a 4-percent rate is a reasonable
indicator of the time value of money as of the applicable
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