Charles A. and Marian L. Derby, et al. - Page 28




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               The APA further provided that each seller was required "to             
          use Seller's best efforts * * * to preserve Seller's present                
          business relationship with suppliers, patients and others having            
          business relationships with Seller" and "to cooperate with * * *            
          [SMF's] attempts to retain the services of the employees of                 
          Seller's Business following the Closing to the extent that * * *            
          [SMF] decides to attempt to employ any such employees."                     
                    4.  Houlihan and Narvco Appraisals                                
               Houlihan issued its appraisal (Houlihan appraisal) on April            
          7, 1995.20  The Houlihan appraisal described SWMG as "a newly               
          formed group of thirty-eight physicians who have practiced in the           
          City of Davis for many years."  Using a discounted cashflow                 
          approach, the Houlihan appraisal concluded that, "as of November            
          1, 1994 and currently, the fair market value of the fixed and               
          intangible assets, excluding working capital, of * * * [SWMG] is            
          reasonably stated as $4 million."                                           
               The tangible assets of the affiliating physicians' practices           
          were valued separately by Narvco Enterprises, Inc. (Narvco).  The           
          standard used by Narvco in valuing the tangible assets, namely,             
          "value in use", was directed by SMF and the SWMG physicians after           
          they had agreed that it was appropriate.  Under the APAs, each              

               20 Respondent contends, and we agree, that the Houlihan                
          appraisal is hearsay.  It was not offered as an expert report               
          under Rule 143(f).  Nonetheless, it was the appraisal relied on             
          by petitioners in the 1994 returns, and it is relevant for                  
          various nonhearsay purposes.                                                






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