Santa Monica Pictures, LLC, Perry Lerner, Tax Matters Partner - Page 56

                                        -141-                                         
          fully set forth in the section of the Appraisal styled ‘Limiting            
          Conditions for the Appraisal.’”  The appraisal report in the                
          record, however, does not contain any section entitled “Limiting            
          Conditions for the Appraisal.”                                              
               Mr. Kutner’s $29 million valuation of the EBD film titles              
          appears highly inflated.  Indeed, that valuation greatly exceeds            
          (by more than three times) the highest value ($9 million) that              
          petitioner’s expert (Steven Wagner) arrived at in valuing the EBD           
          film titles.99  Mr. Kutner’s valuation takes into account                   
          technologies (e.g., DVD) that the other experts in these cases              
          opined were either not foreseen in 1996, were only latently                 
          observable at that time, or were no longer viable.100  In doing             

               99 We discuss the valuation conclusions of petitioner’s                
          expert, Steven Wagner, in more detail infra.                                
               100 For example, Mr. Kutner projected $1,320,000 in DVD                
          revenue.  Although DVD technology was predicted to emerge at some           
          point after 1996, the success of that technology was not readily            
          foreseen.  For that reason, petitioner’s expert projected no                
          revenue from DVD sales in his valuation.  Mr. Kutner also                   
          projected $1,100,000 in royalty income from laserdisc sales.                
          According to petitioner’s expert, laserdisc sales in 1996 were              
          relatively insignificant, even though the technology had been               
          around for a few years.  Neither petitioner’s expert nor                    
          respondent’s expert (Richard Medress) took laserdisc sales into             
          account.  Mr. Kutner also projected $2,410,000 in royalty income            
          from the revenue-sharing (Rentrak) model for the rental market.             
          Under this model, video rental stores would pay a small fee up              
          front to buy a rental film and would then share a portion of the            
          rental fees with Rentrak.  In 1996, however, the rental market              
          still operated on a front-end sales model; i.e., video rental               
          stores made a one-time payment up front (e.g., $59 per copy) to             
          purchase copies of a film, which they could then rent an                    
          unlimited number of times.  Neither petitioner’s expert nor                 
                                                             (continued...)           





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