- 17 -
267 F.3d at 372. The Court of Appeals also pointed out that, in
its view, an assumption that a hypothetical buyer would operate a
company whose expected growth was less than the buyer’s required
return was fatally flawed. Id.
In Estate of Dunn v. Commissioner, supra, the decedent owned
a majority interest in a corporation primarily engaged in renting
out heavy construction equipment. This Court, in deciding the
value of the corporation, assumed that a hypothetical buyer and
seller would give substantial weight to an earnings-based
approach because the corporation was an operating company. This
Court also gave some weight to an asset-based approach because
the corporation’s earnings projections were based on an
atypically poor business cycle that would have produced an
unreasonably low value. In accord with that reasoning, this
Court used a 35-percent/65-percent combination of a cashflow
earnings-based approach and an asset-based approach,
respectively, to value the company. By using that combination of
the two approaches, we rejected the estate’s expert’s sole
reliance on an asset-based approach, where he assumed a
liquidation on the valuation date and reduction for the entire
amount of potential built-in capital gain tax liability.
Although the capital gain tax rate at the corporate level was 34
percent, this Court used a 5-percent reduction for the built-in
capital gain tax liability in the asset-based portion of the
value computation to account for the lower likelihood of
liquidation.
Page: Previous 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 NextLast modified: May 25, 2011