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C&L relied on the 1989 Valuation and the preacquisition review.
C&L determined a total value of the customer relationships using
a capitalization of earnings approach. It further determined
that the appropriate earnings stream to a potential acquirer of
these relationships would be the after-tax earnings generated by
each relationship projected into perpetuity. Thus, it assigned
value to the portions of the relationships extending beyond the
initial periods Technicolor attributed to the relationships. In
both the 1989 and 1994 valuations, C&L used projected annual
pretax earnings to value the Paramount, MCEG, and MGM/UA customer
relationships. After it valued the customer relationships, C&L
subtracted the value of the customer relationships (i.e., as
modified by the closing agreement) and determined that the values
of the Paramount, MCEG, and MGM/UA customer relationships were
$27,496,000, $5,569,000, and $2,698,000, respectively.
On July 7, 1997, petitioners filed amended tax returns
relating to fiscal years ending September 30, 1992 and 1993, and
claimed deductions based on the 1994 Valuation. On their amended
return for 1992, petitioners reported a $27,496,000 loss
deduction attributable to the alleged termination of the
Paramount relationship.6 Similarly, on their amended return
relating to 1993, petitioners reported a $5,569,000 loss
6 The $27,496,000 claimed loss contributed to a net
operating loss that petitioners carried forward and deducted in
the fiscal years ending Sept. 30, 1993 and 1994.
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