However, if Milbrew were tied to the Juneau plant and could not leave, the maximum price NVST would pay would not be affected by the market price of other plants or the market rents charged for similar plants; rather, the price would truly be a function of the rent Milbrew could pay.
To determine the high end of the range, Judge Posner first determined NVST's required return on investment.
Judge Posner adopted the model suggested by the taxpayers and chose as one of his inputs the undisputed rental payments Milbrew was charged by NVST. In so doing, he was able to demonstrate that the taxpayers' claims were internally inconsistent, and he did not need to rely on statements made by Ace and others before state agencies regarding the plant's true owner or its value.
If we determine instead that the expected return is 7.5 percent, the maximum value jumps to approximately $3 million ($220,000/0.075), a 100 percent increase and the purchase price agreed to by NVST and Northland.
(72) This is precisely the test Judge Posner used in Milbrew to determine whether the sale of the plant from Northland to NVST was legitimate.
In Milbrew, Judge Posner asserted that the facts supported the finding that Milbrew and NVST were engaged in a bilateral monopoly.
In Milbrew, Judge Posner relied on the rent charged by NVST to Milbrew to predict the maximum price at which the dairy processing plant would sell.
By using a simple model, Judge Posner was able to show clearly and convincingly that a reasonable investor expecting a fifteen percent return on his investment would never have paid $3 million for the plant, as NVST did.
To avoid the rule of Estate of Franklin, and allow NVST to take depreciation deductions based on the $3 million purchase price, Ace made the note recourse against NVST and its partners.
It made no mention of the purported sale to NVST. In 1973, Ace testified in a Wisconsin real estate tax assessment hearing that the Juneau plant was worth $500,000.