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We disagree with respondent that the value of petitioner’s
favorable financing intangible assets is limited to the value of
the income spread. Dr. Hakala’s income spread analysis is
premised on his conclusion that favorable financing cannot be an
intangible asset. However, in Fed. Home Loan Mortgage Corp. v.
Commissioner, 121 T.C. at 272, we held that favorable financing
was an economic benefit and that “the benefit of * * * below-
market financing can, as a matter of law, constitute an
intangible asset”.
Professor Schaefer explained that the income spread is a
measure of petitioner’s equity value, and that equity is
different from the value of petitioner’s assets, including the
favorable financing intangible assets. Equity is generally
described as the excess of the value of assets (tangible and
intangible) over liabilities. The value of petitioner’s
favorable financing assets is the present value of the cost
savings between the effective contract interest rate on
petitioner’s debt obligations and the prevailing market interest
rates on equivalent debt obligations at the valuation date. To
illustrate the differences between the value of an intangible
asset and equity value, Professor Schaefer gave the following
examples:
To illustrate this further, suppose a company has a
long lease on office space at $5 per square foot when
the market price for similar space is, say, $70. It is
clear that this lease is valuable to the company; if it
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