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convincing than Empire’s and MPI’s reports and the testimony in
support of those reports. AE’s report and the testimony of
Vandervliet and Kettell were cogent and thorough. Vandervliet
and Kettell wrote the AE report and explained it clearly.
Empire’s letter report was, by its terms, limited. Nammacher’s
testimony in support of Empire’s report was unconvincing for
reasons stated at paragraph C-2-b-ii, below. MPI copied portions
of its report verbatim from the Empire report.
2. Tax-Affecting
a. Background
Petitioner’s expert witnesses reduced DGA’s projected income
by 40 percent (Empire) and 35 percent (MPI) based on “tax-
affecting”. Empire reduced DGA’s projected profits by 40 percent
on the assumption that, after a sale, the corporation will lose
its S corporation status.8 See, e.g., Gross v. Commissioner, T.C.
Memo. 1999-254, affd. 272 F.3d 333 (6th Cir. 2001). MPI reduced
DGA’s projected profits by 35 percent because a shareholder is
8 The income of a C corporation is subject to income tax at
the corporate level, and shareholders are taxed on dividends paid
by a C corporation. Secs. 11, 61. In contrast, the income of an
S corporation generally is not taxed at the corporate level, but
is passed through to the shareholder and taxed to the shareholder
when earned, whether or not the corporation pays dividends. Sec.
1366.
Nammacher’s testimony suggests that Empire tax-affected
DGA’s earnings on the assumption that DGA would lose its S
corporation status after or as a result of the hypothetical sale
of its stock. Oliver testified that this is why MPI tax-affected
DGA’s earnings.
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