Opinion ID: 1129291
Heading Depth: 1
Heading Rank: 5

Heading: Income (I)

Text: The figure sought in this part of the valuation process is the numerator in the formula, V = I/R. It represents a predicted income level for United in the year ahead, based upon historical data. The testimony shows that there are a number of different techniques for deriving the income figure, but the expert appraisers for the parties  Davis for United and Roger Maude for the Department  finally settled on the same technique and obtained figures that were relatively close. Davis relied on a performance-ratio analysis, which he described as the best technique. The technique divided the net operating income (NOI) derived from a calendar year by the net operating plant at the start of the same year. [6] This produced a figure representing the percentage of the value of a plant at the beginning of the year that an investor might hope to earn by the end of the year. By Davis' calculations, the performance ratio derived from the actual experience of United for the five previous years was 10.65 percent, yielding a projected income (I) for 1983 of $14,679,158. Rounding off this amount, Davis opined that a reasonable estimate of United's next year's income would be $15,000,000. Roger Maude, one of the Department's experts, also used a performance-ratio analysis much like that done by Davis, although he apparently used a figure representing average plant for the year, rather than net operating plant at the beginning of the year, as his denominator. No explanation for this difference in approaches was offered. Because the average plant was invariably larger than beginning of the year plant, Maude's resulting performance ratios were correspondingly smaller and, therefore, his estimated future income was slightly smaller, viz., $14,431,500, which he rounded up to $14,432,000 for purposes of further calculations. While there was no major difference between the parties as to the revenues to be capitalized, the choice of figures had some impact on the ultimate calculation of value under this approach. The Tax Court's ultimate calculations accepted Maude's figure of $14,432,000. We accept Davis' figure as more persuasive, because the fixed point in time on which the Davis technique depends corresponds to a moment that is significant for regulatory purposes. Rounding off the figure to the nearest thousand, we find the appropriate income figure to be $14,679,000. This will have the net effect of slightly increasing the appellant, United's, tax liability for 1983, but that is one of the risks inherent in de novo review.