Free Memorandum of Contentions of Fact and Law - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS DAVID S. LITMAN And MALIA A. LITMAN, Plaintiffs-Counterdefendants, ) ) ) v. ) ) THE UNITED STATES, ) Defendant-Counterplaintiff ) ____________________________________ ) ) ROBERT B. DIENER And MICHELLE S. DIENER, ) Plaintiffs-Counterdefendants, ) ) v. ) ) THE UNITED STATES, ) Defendant-Counterplaintiff ) ____________________________________ ) ) HOTELS.COM, INC. and Subsidiaries (f/k/a ) HOTEL RESERVATIONS NETWORK, INC.) ) Plaintiffs, ) ) v. ) ) THE UNITED STATES, ) Defendant ) ____________________________________ )

No. 05-956T

No. 05-971T

No. 06-285T (Judge Christine O.C. Miller)

PLAINTIFF HOTELS.COM'S PRETRIAL MEMORANDUM OF CONTENTIONS OF FACT AND LAW February 26, 2007 Kim Marie K. Boylan Latham & Watkins, LLP 555 11th Street, NW Washington, DC 20004 (202) 637-2235 Attorney of Record for Plaintiffs Hotels.com and Subsidiaries Kari M. Larson Latham & Watkins, LLP 555 11th Street, NW Washington, DC 20004 Of Counsel

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TABLE OF CONTENTS Page TABLE OF CONTENTS................................................................................................................. i TABLE OF AUTHORITIES ......................................................................................................... iii INTRODUCTION ...........................................................................................................................1 LEGAL AND FACTUAL CONTENTIONS ..................................................................................6 CONTENTIONS OF FACT ............................................................................................................6 I. II. THE ACQUISITION ...........................................................................................................6 THE AMENDED AND RESTATED ASSET PURCHASE AGREEMENT.....................7 A. The Parties Valued The Remaining Contingent Earn Out Rights And Agreed That Litman And Diener Would Receive Restricted HRN Stock Equal To The Value Of Those Rights......................................................................8 The Litmans And Dieners Received Additional Contingent Purchase Price Simply Because An IPO Was Consummated ........................................................10 Mandatory Consistent Tax Treatment ...................................................................12 SEC Correspondence, The Registration Statement, And The Prospectus .............12 The IPO Process.....................................................................................................13 The Closing Of The IPO Was A Condition Precedent To The Litmans' And Dieners' Ownership Of The Stock.................................................................14 HRN Became A Separate Company On March 1, 2000........................................15 Subsequent Official Descriptions Of The Transaction Comport With Hotels.com's Primary Position ..............................................................................16

B. C. III. A. B. C. D. E. IV. V.

THE 2000 IPO ...................................................................................................................12

THE AMENDMENT TO THE AMENDED AND RESTATED ASSET PURCHASE AGREEMENT .............................................................................................17 2000 TAX RETURN POSITIONS....................................................................................17 A. The Litmans' And Dieners' Returns......................................................................17 1. 2. 3. 4. B. C. The Valuation Date Mystery......................................................................18 The Discount..............................................................................................18 The Dual Purpose Of The Valuation .........................................................19 KPMG's "Review" Of The Mitchell 2000 Valuation................................19

Hotels.com's Tax Returns......................................................................................20 The IRS Audits And Subsequent Litigation ..........................................................22

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VI.

THE TRIAL EXPERTS.....................................................................................................23 A. B. C. The Litmans' And Dieners' Expert........................................................................23 The United States' Expert......................................................................................23 Hotels.com's Expert...............................................................................................24

CONTENTIONS OF LAW ...........................................................................................................25 ARGUMENT.................................................................................................................................28 I. II. THE AMENDED AND RESTATED ASSET PURCHASE AGREEMENT IS DISPOSITIVE OF THE ISSUES BEFORE THIS COURT .............................................28 IN THE ALTERNATIVE, IF THE CONTRACT DOES NOT ESTABLISH ITS VALUE, THE STOCK MUST BE VALUED AS OF MARCH 1, 2000..........................33 A. All Of The Trial Experts Agree On The Starting Point For Valuation..................33 1. 2. 3. B. C. March 1, 2000 Is The Proper Valuation Date ............................................33 The Value Of A Freely Tradable Share Of HRN Stock On March 1, 2000 Is Easily Determined.....................................................................35 Two Of The Three Trial Experts Agree That 20 Percent Is The Appropriate Level Of Discount .................................................................35

In The Further Alternative, Valuation As Of February 25, 2000 Must Be Based On The Market Price Of HRN Stock ..........................................................36 In The Further Alternative, Valuation As Of February 24, 2000 Would Not Begin With The IPO Price ..............................................................................36 1. 2. Litman And Diener Directed The Date To Be Placed On The Stock Certificate.........................................................................................37 A Stock Certificate Is Not Determinative Of Ownership ..........................38

III.

WHATEVER OCCURRED DURING THE IRS AUDIT IS IRRELEVANT AND INADMISSIBLE ...............................................................................................................39

CONCLUSION..............................................................................................................................40 APPENDIX A, APB No. 16

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TABLE OF AUTHORITIES Page(s) CASES 150 Broadway New York Associates, L.P. v. Bodner, 784 N.Y.S.2d 63 (N.Y. App. Div. 2004) .....................................................................33, 34 Commissioner v. Patino, 186 F.2d 962 (4th Cir. 1950) .............................................................................................31 Cook v. United States, 46 Fed. Cl. 110 (2000) .......................................................................................................40 Fireplace Shop, Inc. v. Fireplace Shop of Lafayette, Inc., 400 So. 2d 702 (La. Ct. App. 1981)...................................................................................38 Gould, Inc. v. United States, 935 F.2d 1271 (Fed. Cir. 1991)..........................................................................................33 Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324 (1974).......................................................................................................39, 40 Grill v. United States, 157 Ct. Cl. 804 (1962) .......................................................................................................22 Hunt Construction Group, Inc. v. United States, 281 F.3d 1369 (Fed. Cir. 2002)....................................................................................29, 33 In re Matco-Norca, Inc., 802 N.Y.S.2d 707 (N.Y. App. Div. 2005) .............................................................28, 30, 34 International Paper Co. v. United States, 36 Fed. Cl. 313 (1996) .......................................................................................................40 Jack Daniel Distillery v. United States, 180 Ct. Cl. 308 (1967) .................................................................................................32, 39 Jupiter Corp. v. United States, 2 Cl. Ct. 58 (1983) .............................................................................................................38 Mazzola v. County of Suffolk, 533 N.Y.S.2d 297 (N.Y. App. Div. 1988) ...................................................................28, 34 Migliore v. Manzo, 813 N.Y.S.2d 762 (N.Y. App. Div. 2006) .........................................................................28

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Moore-McCormack Lines, Inc. v. Commissioner, 44 T.C. 745 (1965).............................................................................................................31 Philadelphia Park Amusement Co. v. United States, 130 Ct. Cl. 166 (1954) .......................................................................................................31 Ruth v. United States, 823 F.2d 1091 (7th Cir. 1987) ...........................................................................................40 Sara Lee Corp. v. United States, 29 Fed. Cl. 330 (1993) .......................................................................................................40 Southern Natural Gas Co. v. United States, 188 Ct. Cl. 302, 358 (1969) ...............................................................................................31 W.W.W. Associates, Inc. v. Giancontieri, 566 N.E.2d 639 (N.Y. 1990)..............................................................................................28 Walter v. Commissioner, No. 8321-05, 2007 WL 14634 (T.C. Jan. 3, 2007) ............................................................34 Weinstein v. Hartford Chemical Corp., 393 N.Y.S.2d 74 (N.Y. App. Div. 1977) ...........................................................................38 Weisberger v. Goldstein, 662 N.Y.S.2d 544 (N.Y. App. Div. 1997) .........................................................................28 Wood v. United States, 89 Ct. Cl. 442 (1939) .........................................................................................................32 STATUTES AND REGULATIONS 26 U.S.C. § 1501............................................................................................................................16 26 U.S.C. § 1504............................................................................................................................16 26 U.S.C. § 7422............................................................................................................................25 28 U.S.C. § 1491............................................................................................................................25 Treas. Reg. § 20.2031-1(b) ............................................................................................................32

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OTHER AUTHORITY Federal Rule of Evidence 408........................................................................................................40 Rev. Rul. 59-60, 1959-1 C.B. 237 ...........................................................................................35, 39 Alan S. Gutterman & Bentley J. Anderson, Managing the Initial Public Offering of Securities, 59 C.P.S. (BNA 2007)......................................................................................14 *APB Opinion No. 16, Business Combinations (August 1970) ....................................................32 Statement of Financial Accounting Concepts No. 7 (February 2000) ..........................................32 Statement of Financial Accounting Standards No. 135, Rescission of FASB Statement No. 75 and Technical Corrections (1999) ................................................................................32 18A Am. Jur. 2d Corporations § 619 ............................................................................................38 Webster's II New College Dictionary (1995) ...............................................................................34

* As a courtesy to the Court, the item marked with an asterisk is attached hereto in Appendix A. APB Opinion No. 16 is no longer in effect and is difficult to locate.

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N THE UNITED STATES COURT OF FEDERAL CLAIMS DAVID S. LITMAN And MALIA A. LITMAN, Plaintiffs-Counterdefendants, v. THE UNITED STATES, Defendant-Counterplaintiff ____________________________________ ) ) ) No. 05-956T ) ) ) )

) ) ROBERT B. DIENER And MICHELLE S. DIENER, ) Plaintiffs-Counterdefendants, ) ) No. 05-971T v. ) ) THE UNITED STATES, ) Defendant-Counterplaintiff ) ____________________________________ ) ) HOTELS.COM, INC. and Subsidiaries (f/k/a ) HOTEL RESERVATIONS NETWORK, INC.) ) Plaintiffs, ) No. 06-285T ) (Judge Christine O.C. Miller) v. ) ) THE UNITED STATES, ) Defendant ) ____________________________________ ) PLAINTIFF HOTELS.COM'S PRETRIAL MEMORANDUM OF CONTENTIONS OF FACT AND LAW ___________________ INTRODUCTION This dispute is about the amount of additional consideration paid in 2000 by HRN, Inc., Hotels.com's predecessor, to the Litmans and Dieners1 in connection with the 1999 purchase of two companies Litman and Diener founded. The crux of the issue is whether the Litmans and

1

References to "Litman" are to Mr. Litman and references to "Diener" are to Mr. Diener. References to the "Litmans" are to both Mr. and Mrs. Litman and references to the "Dieners" are to both Mr. and Mrs. Diener. 1

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Dieners should be held to an agreement that both Litman and Diener sought, heavily negotiated, and, together with their wives, personally signed. This agreement is dispositive of the issue before the Court. The agreement at issue is an Amended and Restated Asset Purchase Agreement which resulted from the parties' renegotiation of the terms of the original Asset Purchase Agreement under which HRN purchased the two companies. Under the original Asset Purchase Agreement, the Litmans and Dieners were paid $246,000,000 and also had the possibility of receiving two forms of additional, contingent purchase price: (1) performance-based payments unlimited in amount for 2000, 2001, and 2002 under various earn out provisions; and (2) shares of restricted HRN stock valued at the IPO price if HRN were to complete successfully an initial public offering ("IPO"). The uncertainty attendant to HRN's unlimited additional purchase price obligations under the Asset Purchase Agreement's earn out provisions, a common desire to better align the interests of Litman and Diener with those of HRN, and the decision of HRN's parent company to attempt an IPO of HRN led to the Amended and Restated Asset Purchase Agreement. The parties carved out the 2000 earn out payment (which was ultimately paid in cash) and negotiated the value of the remaining 2001 and 2002 contingent purchase price payments. The parties agreed that the value of those rights was $81,600,000. The agreed value of $81,600,000 was to be paid "simultaneously with the initial close of the IPO" in the form of restricted stock if, and only if, HRN were to complete an IPO on or before March 31, 2000. In that case, a trust established and controlled by the Litmans and Dieners2 would receive restricted HRN stock equal to the agreed $81,600,000 value of the remaining earn out rights. The Amended and

2

This grantor trust is called the TMF Liquidating Trust (the "Trust"). 2

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Restated Asset Purchase Agreement also modified slightly the terms of the second form of contingent purchase price, the contingent restricted stock payment that would be made solely if an IPO were completed. Importantly, the Litmans and Dieners proposed much of the stock restriction language that appeared in the Amended and Restated Asset Purchase Agreement. Thus, all such restrictions were taken into account when the parties negotiated how both forms of additional, contingent purchase price would be converted into shares of restricted stock. HRN did complete its very successful IPO on March 1, 2000. As a result, the Litmans and Dieners were paid the agreed-upon additional purchase price of $81,600,000 in extinguishment of their remaining earn out rights. Under the formula negotiated by the parties, that amount was paid in the form of 5,100,000 shares of restricted HRN stock. In addition, the Litmans and Dieners received the second category of additional purchase price under the IPO provision: 4,899,900 shares of restricted HRN stock, valued at $78,398,400 pursuant to the terms of the Amended and Restated Asset Purchase Agreement. As a result, the total additional purchase price paid to the Litmans and Dieners under the Amended and Restated Asset Purchase Agreement was $159,998,400. Both Litman and Diener stated to the SEC, in writing, that this was the value of the additional purchase price they received from the sale of the two companies in the form of restricted stock.3 Because the payment of the stock was deferred contingent purchase price, it represented a payment of additional goodwill by HRN to the Litmans and Dieners. Hotels.com claimed additional amortization deductions on its 2000 Federal income tax return based on the agreed $159,998,400 value of what was paid to the Litmans and Dieners.
3

In the SEC filings, the $159,998,400 of additional purchase price was rounded to $160 million. 3

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The current dispute was created not by Hotels.com, but by the Litmans and Dieners when they violated the Amended and Restated Asset Purchase Agreement and took tax return positions that rejected that Agreement. They now claim that the total value they received was $45,437,822 and not the $159,998,400 they actually received. This unfounded claim is not merely inconsistent, it is in direct violation of Section 3.4(ii) of the Amended and Restated Asset Purchase Agreement, which explicitly prohibited such shenanigans: For all Tax purposes, the Buyer [HRN] and the Sellers [the Litmans and Dieners] agree (A) to report the transactions contemplated by this Agreement in a manner consistent with the terms of this Agreement and (B) that none of them will take any position inconsistent therewith in any Tax Return. The Amended and Restated Asset Purchase Agreement is dispositive of the issue before the Court: the proper value of the total additional, contingent purchase price the Litmans and Dieners agreed to be paid in the form of restricted stock is the arm's length value negotiated by the parties, memorialized in the Agreement, and reported to the SEC and all of HRN's public shareholders ­ $159,998,400. In Hotels.com's view, this case requires no expert testimony. By contrast, the Litmans and Dieners allege that the additional purchase price they sought, freely negotiated, agreed to, and reported to the SEC and the world can somehow have a radically different value for tax purposes, notwithstanding section 3.4(ii) of the Amended and Restated Asset Purchase Agreement quoted above. Moreover, their position would require the Court to ignore the condition precedent to the receipt of the stock ­ the closing of an IPO ­ and to conclude that they owned the stock before the IPO even occurred. Thus, the Litmans' and Dieners' position is completely unsupportable and should be rejected. The value of the additional, contingent purchase price paid by HRN was $159,998,400. Hotels.com argues solely in the alternative that if the clear terms of the Amended and Restated Asset Purchase Agreement are not controlling, only then should the testimony of

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valuation experts be relied upon to determine the fair market value of the restricted stock. What must then be determined is the proper valuation date, the discount to apply to account for the agreed upon restrictions on the stock, and the stock price against which to apply the discount. Each of the parties has retained a trial expert. The proper valuation date is March 1, 2000 ­ the date on which the IPO closed. As discussed above, the Litmans and Dieners were entitled to receive the restricted stock if, and only if, an IPO were completed. Therefore, March 1, 2000 is the date the Litmans and Dieners acquired beneficial ownership of the stock under the express terms of the Amended and Restated Asset Purchase Agreement and the authorizing resolution of the HRN Board of Directors (which, as members of the Board, Litman and Diener personally approved). The Trust also acknowledged receipt of the restricted stock and released HRN from all of its obligations under the Amended and Restated Asset Purchase Agreement on March 1, 2000. With respect to the proper level of discount, the discounts computed by the experts for two directly adverse parties, Hotels.com and the United States, are virtually identical, 20 percent and 20.3 percent, respectively. This is overwhelming evidence that an approximately 20 percent discount should be applied. The over 70 percent average discount determined by the Litmans' and Dieners' expert should be rejected. Finally, the stock price against which to apply the discount is clear. All of the experts agree that the fair market value analysis must begin by using a willing-buyer/willing-seller paradigm ­ that is, the starting point for the valuation is the price on the valuation date at which a willing buyer would buy, and a willing seller would sell, a freely-tradable share of HRN stock. No guesswork is needed to determine the price at which a freely-tradable share of HRN stock could be sold on March 1, 2000. The HRN stock traded on the NASDAQ exchange and closed

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at $26.25 per share. The weighted average price on that day was $25.8756. Thus, if the deferred purchase price agreed to under the terms of the Amended and Restated Asset Purchase Agreement were not respected, the proper application of long-standing valuation principles and case law would mandate the result put forth by Hotels.com in its alternative position, namely, that the value of the total additional purchase price was equal to the value of the freely tradable price of the HRN stock less a 20 percent discount.4 LEGAL AND FACTUAL CONTENTIONS The central issue in this case is the value of the additional, contingent purchase price paid by Hotels.com to the Litmans and Dieners in the form of restricted stock. CONTENTIONS OF FACT I. THE ACQUISITION In 1999, Litman and Diener, the founders of Hotels.com's two predecessor companies, TMF, Inc. ("TMF") and HRN Marketing Corp. ("HRN Marketing"), sold substantially all the assets and liabilities of TMF and HRN Marketing to HRN, Inc. ("HRN"), a newly-created, wholly-owned subsidiary of USA Networks, Inc. ("USA")5 pursuant to an Asset Purchase Agreement dated as of April 13, 1999. The Litmans and Dieners received up-front cash of $145,000,000. Under the Asset Purchase Agreement, they also were entitled to additional, contingent purchase price payments (1) under various earn out provisions and (2) if HRN were to complete an IPO. The performance-based earn out payments were to continue until 2002 and were not "capped" as to amount. As of December 31, 2000, not including the additional

As discussed below, Hotels.com also asked its expert to value the stock, as a further alternative, as of February 25, 2000 and, as a still further alternative, as of February 24, 2000. USA had changed its name to USA Interactive in 2002 and to InterActiveCorp in June 2003, but for simplicity is referred to herein as USA. 6
5

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purchase price at issue here, the purchase price received by the Litmans and Dieners totaled $246,000,000. Litman and Diener, the CEO and President, respectively, of TMF and HRN Marketing, remained in these positions after the 1999 acquisition by HRN. The earn out provisions caused conflict between Litman, Diener and HRN/USA because the parties' interests were not fully aligned. Litman and Diener sought to have their earn out rights exchanged for HRN stock. The parties heavily negotiated the computation of the contingent purchase price payments under the various earn out formulas in the original Asset Purchase Agreement. II. THE AMENDED AND RESTATED ASSET PURCHASE AGREEMENT On November 5, 1999, the HRN Board of Directors authorized an initial public offering ("IPO") of its stock and appointed two of the directors, Victor Kaufman and Dara Khosrowshahi, to serve as the "Pricing Committee" which would negotiate and approve the IPO price and all other matters with respect to the IPO. On November 6, 1999, Litman and Diener became Board members of HRN. The uncertainty attendant to HRN's otherwise unlimited additional purchase price obligation under the Asset Purchase Agreement's earn out provisions, a desire to better align the interests of Litman and Diener with those of HRN, and HRN's decision to attempt an IPO all led to the negotiation of the Amended and Restated Asset Purchase Agreement. The Board approved amending the original Asset Purchase Agreement on December 23, 1999. Litman and Diener, in their role as members of the HRN Board, approved this action.

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A.

The Parties Valued The Remaining Contingent Earn Out Rights And Agreed That Litman And Diener Would Receive Restricted HRN Stock Equal To The Value Of Those Rights

At the time the parties agreed to amend the original Asset Purchase Agreement, Litman and Diener were still entitled to contingent deferred cash purchase price payments computed under the earn out provisions for the periods ending March 31, 2000, 2001, and 2002. The parties carved out the 2000 earn out payment and agreed that it would be paid in cash under the terms of the original Asset Purchase Agreement. In connection with the Amended and Restated Asset Purchase Agreement, Litman and Diener, on the one hand, and USA and HRN, on the other, heavily negotiated the value of the additional purchase price attributable to the remaining earn out payments for 2001 and 2002. The parties agreed that these rights were worth $81,600,000. In addition, they negotiated how the agreed amount would be paid and when it would be paid. The parties agreed that it would be paid in the form of restricted stock "[s]imultaneously with the initial closing of the 2000 IPO." In fact, Litman and Diener, who are both lawyers, and their outside counsel, Brian Lidji, proposed the terms of many of the stock restrictions that are set forth in the Amended and Restated Asset Purchase Agreement. In sum, the parties agreed to a payment by HRN to the Litmans and Dieners of $81,600,000 in additional purchase price in "full satisfaction" of the remaining earn out rights if an IPO, in fact, were completed. The Amended and Restated Asset Purchase Agreement specifically sets forth the $81,600,000 value and provides the formula by which the number of shares of restricted HRN stock that would be paid in "full satisfaction" of this amount would be computed. These shares are defined in the Amended and Restated Asset Purchase Agreement as the "Section 7.15 Shares." Under the Section 7.15 formula, if the IPO price ultimately were below $11 per share, then $11 would be used as the denominator in the computation of the number of Section 7.15

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Shares to be paid. If the IPO price ultimately were set above $16.25 per share, then the denominator would be $16.25. If the IPO price were between $11 and $16.25, as was the case here, the $81,600,000 of agreed, additional purchase price would be divided by the IPO price. The Shares were to be issued to a Trust controlled by the Litmans and Dieners (the "TMF Liquidating Trust"). Because the Amended and Restated Asset Purchase Agreement was executed as of February 2, 2000, and the IPO price had not been set at that time, the Litmans and Dieners did not know at the time they executed the Amended and Restated Asset Purchase Agreement how many Shares they would receive in exchange for the agreed $81,600,000 of additional purchase price. However, they did know that regardless of how many Shares they received, those Shares would be worth $81,600,000. Because the IPO price was ultimately set at $16 per share, pursuant to Section 7.15.1(i) of the Amended and Restated Asset Purchase Agreement, the number of Section 7.15 Shares the Litmans and Dieners received in full satisfaction of the $81,600,000 agreed amount of additional purchase price was 5,100,000.6 If the IPO price had been set at $11 per share, the Litmans and Dieners would have received more Section 7.15 Shares so that the number of Shares equaled the agreed $81,600,000 value. If the IPO price had been set at $16.25, then they would have received fewer Section 7.15 Shares, but, again, the total value of those Shares still would have been the agreed $81,600,000.

6

$81,600,000/$16 = 5,100,000 shares. 9

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A condition precedent to this entire exchange, however, was the conclusion of an IPO on or before March 31, 2000.7 In that event, the Section 7.15 Shares were to be issued "[s]imultaneously with the initial closing of the 2000 IPO." Any other date of issuance would not only have been contrary to the express terms of the Amended and Restated Asset Purchase Agreement, but would also have been an unauthorized corporate action. The HRN Board of Directors authorizing resolution provides that the Section 7.15 and Section 7.11.3 Shares would be "validly issued" only "upon issuance in accordance with the Amended Asset Purchase Agreement . . . ." Litman and Diener, in their role as members of the Board, approved this resolution. The initial closing of the 2000 IPO occurred on March 1, 2000. The expiration dates of the restrictions on the stock received in the exchange, like the Litmans' and Dieners' entitlement to the stock itself, were triggered off of the IPO's initial closing date. The restrictions expired over four-years on the anniversary of the IPO's initial closing. Litman's, Diener's, and Lidji's internal analyses of the restrictions also use the March 1st closing date. Also on March 1, 2000, Litman, Diener, and the Trust acknowledged receipt of the Section 7.15 Shares and released HRN from all of its obligations under Section 7.15 of the Amended and Restated Asset Purchase Agreement. Therefore, March 1, 2000 is the date the Litmans and Dieners were entitled to the Section 7.15 Shares. B. The Litmans And Dieners Received Additional Contingent Purchase Price Simply Because An IPO Was Consummated

In addition to the Section 7.15 Shares, under Section 7.11.3 of the Amended and Restated Asset Purchase Agreement the Litmans and Dieners were also entitled to additional deferred
7

Although not relevant to Hotels.com's primary legal argument, the date on which the Litmans and Dieners were legally entitled to the shares at issue is significant in the context of Hotels.com's alternative arguments. 10

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purchase price, again payable in shares of restricted HRN stock, in the event HRN consummated an IPO. The Litmans' and Dieners' entitlement to additional purchase price in the event of an IPO also existed under the original Asset Purchase Agreement. The original Asset Purchase Agreement required HRN to issue, "if, . . ., the Buyer consummates an initial public offering of its common stock (an `IPO')" a number of shares of common stock of [HRN] having an aggregate value (based on the price per share in the IPO) equal to the product of (x)(i) the total issued and outstanding shares of [HRN] immediately prior to the IPO times the IPO price minus (ii) the Net Debt Capital multiplied by (y) 10%. The Amended and Restated Asset Purchase Agreement revised this formula slightly to take into account the new fact that if there were an IPO, the Litmans and Dieners would also receive the Section 7.15 Shares in exchange for extinguishing their remaining earn out rights. Section 7.11.3 of the Amended and Restated Asset Purchase Agreement provided that the Litmans and Dieners would be entitled to additional shares of restricted stock (the "Section 7.11.3 Shares") if HRN "consummates an initial public offering of shares of its common stock," computed as follows: a number of shares of common stock of [HRN] having an aggregate value (based on the price per share in the IPO) equal to the product of (x)(i) the total issued and outstanding shares of [HRN] immediately prior to the IPO (which shall include the shares issued under Section 7.15 simultaneous with the IPO) times the IPO price minus (ii) the Net Debt Capital multiplied by (y) 10%. [emphasis added] Thus, the only change to the original provision was to include, for purposes of computing the 10 percent, the number of Shares that would be issued under Section 7.15. Because an IPO was consummated on March 1, 2000, the Litmans and Dieners received an additional 4,899,900 Shares of restricted HRN stock under Section 7.11.3. Under the unambiguous terms of Section 7.11.3 of the Amended and Restated Asset Purchase Agreement, the "aggregate value (based on the price per share in the IPO)" of these Shares, taking into

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account all of the restrictions to which they were subject, was $78,398,400."8 As stated above, the initial closing of the 2000 IPO occurred on March 1, 2000. On March 1, 2000, Litman, Diener, and the Trust acknowledged receipt of the Section 7.11.3 Shares and released HRN from all of its obligations under Section 7.11.3 of the Amended and Restated Asset Purchase Agreement. 9 C. Mandatory Consistent Tax Treatment

Under the Amended and Restated Asset Purchase Agreement, the above-described provisions also govern the reporting of the transaction for tax purposes. Specifically, Section 3.4(ii) of the Amended and Restated Asset Purchase Agreement provides that "[f]or Tax purposes, the Buyer [Hotels.com] and the Sellers [Litman and Diener] agree (A) to report the transactions contemplated by this Agreement in a manner consistent with the terms of this Agreement, and (B) that none of them will take any position inconsistent therewith in any Tax Return." Hotels.com reported the transaction at issue in a manner consistent with the Amended and Restated Asset Purchase Agreement. By claiming that the additional purchase price they received was $45 million rather than the agreed $159,998,400 they actually received, the Litmans and Dieners did not. Rather, they violated the express terms of the Amended and Restated Asset Purchase Agreement. III. THE 2000 IPO A. SEC Correspondence, The Registration Statement, And The Prospectus

The documentation of the 2000 IPO is completely consistent with Hotels.com's primary position in this case, namely, that the Amended and Restated Asset Purchase Agreement is

8 9

The IPO price was $16 per share. Thus, 4,899,900 shares x $16 = $78,400,000.

The Amended and Restated Asset Purchase Agreement defines the Section 7.11.3 Shares together with the Section 7.15 Shares collectively as the "2000 IPO Shares." 12

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controlling. In connection with finalizing the IPO's governing document, the Form S-1 (Registration Statement (which includes the Prospectus)), the SEC raised several issues with respect to the description of the additional purchase price to be paid to the Litmans and Dieners if the IPO were completed. Ultimately, the SEC required that the transaction be described consistently with the terms of the Amended and Restated Asset Purchase Agreement. HRN complied with this requirement. The final Prospectus is dated February 25, 2000. It stated that "under the amended and restated asset purchase agreement, we [HRN] will issue to TMF Liquidating Trust, as the party designated by TMF, Inc. and HRN Marketing Corp., 9,999,90010 shares of class A common stock immediately prior to the closing of this offering," and that the issuance of those Shares will result in HRN having "approximately $160 million" of additional goodwill. B. The IPO Process

In February 2000, Litman and Diener participated in what are known as "road shows" to educate prospective investors regarding the prospects of HRN and the merits of the anticipated IPO. The interest in the HRN IPO was very strong and it was oversubscribed. The IPO price eventually set by the Pricing Committee of HRN's Board of Directors was $16 per share. Neither Litman nor Diener was on this committee. Consistent with standard practice, the ability to purchase HRN shares at the IPO price was offered only to select investors and "friends and family." After the IPO price is set but before an IPO actually starts to trade publicly, underwriters seeking to trade in a stock make bids and offers based on their knowledge of the market and the anticipated demand for the shares. These "pre-open bid and offer prices" are the best indication

10

The sum of the Section 7.15 and 7.11.3 Shares is 9,999,900. 13

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of the freely-tradable value of shares prior to the commencement of actual securities exchange trading. The pre-open bid and offer prices on the HRN stock started at $23 and $27, respectively. The HRN stock began to trade publicly on February 25, 2000, and the initial closing of the IPO occurred on March 1, 2000. The closing price of the HRN stock was $26 on February 25th and $26.25 on March 1st. The weighted average price of the stock was $25.1030 and $25.8756 on February 25th and March 1st, respectively. While not relevant to Hotels.com's primary legal position, the freely tradable value of the HRN Stock is relevant to Hotels.com's alternative positions. Generally, five business days after the Registration Statement for the IPO becomes effective, a "closing" occurs where documents necessary to complete the transaction are executed.11 The initial closing of the HRN IPO occurred on March 1, 2000. Because the IPO was oversubscribed, there was an additional allocation of shares. This subsequent closing for the IPO occurred on March 2, 2000. C. The Closing Of The IPO Was A Condition Precedent To The Litmans' And Dieners' Ownership Of The Stock

The date on which the Litmans and Dieners obtained beneficial ownership of the stock at issue also is not relevant under Hotels.com's primary legal position. However, if the Court were to conclude that the Amended and Restated Asset Purchase Agreement were not controlling, and would therefore be forced to engage in a valuation exercise, then the date the Litmans and Dieners obtained beneficial ownership of the stock is critical. The underwriters of the IPO did not receive their stock until the IPO actually closed on March 1, 2000. Litman, Diener, and the Trust released HRN of its obligations and acknowledged receipt of the Section 7.15 and 7.11.3
11

If the documents are executed earlier, they are held in escrow until the actual closing date. For a description of the IPO process, see Alan S. Gutterman & Bentley J. Anderson, Managing the Initial Public Offering of Securities, 59 C.P.S. (BNA). 14

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Shares on March 1, 2000. The Amended and Restated Asset Purchase Agreement imposed a condition precedent to the receipt of both the Section 7.15 and Section 7.11.3 Shares ­ the completion or consummation of the IPO on or before March 31, 2000. In that event, the Section 7.15 Shares would be issued "simultaneously with the initial close of the IPO" and the Section 7.11.3 Shares would be issued only if HRN "consummate[d] an initial public offering of its common stock." As noted above, the HRN IPO closed on March 1, 2000. The Board, including Litman and Diener, resolved that the Section 7.15 and 7.11.3 Shares "upon issuance in accordance with the Amended Asset Purchase Agreement, will be validly issued . . . ." Thus, the Litmans and Dieners did not own the Shares prior to the March 1, 2000 closing date of the IPO. D. HRN Became A Separate Company On March 1, 2000

The stock certificate received by the Trust for the Section 7.15 and 7.11.3 Shares is dated February 24, 2000. The Litmans and Dieners are expected to assert that the date on the stock certificate establishes their rights to the stock. Again, this position is only relevant in the context of Hotels.com's alternative position. As discussed below, this assertion is incorrect as a matter of law. As a factual matter Litman, in his role as a trustee of the Trust, and Lidji directed the transfer agent to issue the stock as of that date. If the Litmans and Dieners are correct that their stock was validly issued as of February 24, 2000 (which is inconsistent with the express terms of the Amended and Restated Asset Purchase Agreement), that stock would have represented 20.4 percent of the total shares outstanding12 and, as a result, HRN would have been deconsolidated from USA on that date. This did not occur. Rather, HRN became deconsolidated from USA on

12

(9,999,900 shares)/(9,999,900 + 38,999,100 shares held by USA) = 20.4 percent 15

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March 1, 2000 because, as of that date, USA no longer owned 80 percent of the vote and value of HRN. HRN's short taxable year began on March 1, 2000 and ended on December 31, 2000.13 E. Subsequent Official Descriptions Of The Transaction Comport With Hotels.com's Primary Position

The description of the transaction in HRN's 2000 Annual Report also was consistent with the terms of the Amended and Restated Asset Purchase Agreement and Hotels.com's primary position in this case. In the HRN Annual Report, which both Litman and Diener signed, they admitted: On May 10, 1999, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of TMF, Inc. and HRN Marketing Corp., which operated the Hotel Reservations Network service. The total purchase price paid through December 31, 2000 is $406 million, which is comprised primarily of $145 million paid on May 11, 1999; $5 million related to a promissory note which was paid on January 31, 2000; $50 million related to contingent payments based on the operating performance for the year ended December 31, 1999; $78.4 million related to 4,899,900 shares of class A common stock issued to the sellers of the predecessor business which represented 10% of the aggregate value of the Company immediately prior to the initial public offering in accordance with the asset purchase agreement; $46 million based on operating performance for the twelve-month period ended March 31, 2000; and $81.6 million related to 5,100,000 shares of class A common stock issued to the sellers of [TMF and HRN Marketing] in exchange for their release of the Company's obligation for contingent payments based on operating performance for the twelve month periods ended March 31, 2001 and 2002. [emphasis added]. Virtually identical language was contained in the Form 10-Q filed with the SEC for the first quarter of 2000, which was signed by Litman. Thus, Litman and Diener reported to the SEC that the value of the additional purchase price they received in exchange for the extinguishment of their remaining earn out rights was $81.6 million, that the value of the Shares they received

Under Sections 1501 and 1504 of the Internal Revenue Code, a corporation can be included in a consolidated return only if its parent company owns at least 80 percent of the total voting power and 80 percent of the total value of the subsidiary's stock. 26 U.S.C. §§ 1501, 1504. 16

13

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simply because an IPO was consummated was $78.4 million and, therefore, the total value of their restricted stock was $160 million. IV. THE AMENDMENT TO THE AMENDED AND RESTATED ASSET PURCHASE AGREEMENT In 2002, HRN changed its name to Hotels.com. In 2003, Hotels.com went private and was once again a subsidiary of USA. USA, which owned both Hotels.com and one of its primary competitors ­ Expedia, Inc. ­ reorganized the consolidated company and made Expedia Hotels.com's direct parent company. Litman and Diener chose to leave Hotels.com rather than continue working within the new corporate structure. When Litman and Diener decided to leave the company, they also renegotiated the Amended and Restated Asset Purchase Agreement. The Amendment lifted all of the remaining restrictions on the 2000 IPO Shares early. V. 2000 TAX RETURN POSITIONS The Litmans and Dieners filed their individual tax returns after the HRN return was filed and took positions they knew were contrary to (1) the position already taken by HRN in its 2000 return; (2) all of the provisions the Litmans and Dieners had agreed to in the Amended and Restated Asset Purchase Agreement, and in the Board resolution they had approved; and (3) their own statements made in SEC filings. Unlike the Litmans and Dieners, Hotels.com adhered to its agreement and reported the additional purchase price paid using the $159,998,400 value that had been agreed to by all of the parties. A. The Litmans' And Dieners' Returns

The Litmans and Dieners will undoubtedly allege that their tax reporting was based on the tax reporting of the Trust (which they also controlled). Rather than use the negotiated and agreed-upon value of the deferred purchase price of $159,886,400, the Trust appears to have

17

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reported the value of the stock as $45,437,822, based, in part, on an appraisal performed by Mark Mitchell. The Trust reported the value of the stock as additional capital gain from the sale of TMF, Inc. and HRN Marketing. 1. The Valuation Date Mystery

Mitchell, the appraiser whom the Trust, the Litmans, and the Dieners relied upon for purposes of their tax return positions, used a valuation date of February 24, 2000 in the report he prepared in 2000. However, in their depositions, neither Mitchell, Litman, nor Diener were able to explain why that valuation date was selected or by whom. Even stranger, a draft of Mitchell's 2000 report summary faxed to Litman and Diener on February 25, 2000, used February 25th as the valuation date. This document was produced to Hotels.com after the close of discovery. Mitchell is also serving as the trial expert for the Litmans and Dieners. In his trial report, Mitchell uses a valuation date of February 24, 2000. However, a second appraiser hired by Litman and Diener, David Bohlmann, used February 25th as the valuation date in his report. 2. The Discount

In his final 2000 report, Mitchell determined that the restrictions on the Section 7.15 and 7.11.3 Shares should result in an average marketability discount of approximately 70 percent, to be applied to the "market price of the Hotel Reservations Network, Inc. stock to reflect the fair market value of the stock giving consideration to relevant resale restrictions." This was consistent with his February 25, 2000 draft. Also consistent with the draft, his final 2000 report defined fair market value as "the price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts." Contrary to his February 25, 2000 draft report, Mitchell omitted any total value for the stock in

18

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his final 2000 report. Litman and Diener made the decision to apply the 70 percent discount to the $16 IPO price of the stock. 3. The Dual Purpose Of The Valuation

Mitchell's 2000 valuation not only served as the basis for the Litmans' and Dieners' decision to report capital gains far lower than the agreed-upon value of the consideration they received, but it also served as the basis for the value of "tracking interests" in the Trust. As discussed above, the Litmans and Dieners chose to have the stock at issue held by the Trust. Although the stock was subject to the same restrictions in the hands of the Trust as it would have been if held by Litman and Diener directly, those restrictions did not stop Litman and Diener from accomplishing their estate planning goals. "Tracking interests" in the TMF Liquidating Trust were created, which allowed Litman and Diener to sell beneficial interests in the Trust itself. These tracking interests were initially held by Litman and Diener in equal shares. The 2000 Mitchell valuation used by the Litmans and Dieners to value the stock for purposes of reporting their capital gains was also used to establish the value the Litmans' children and Mrs. Litman would have to pay to Mr. Litman to acquire some of his tracking interests and the value Mrs. Diener and the Dieners' children would have to pay to their father to acquire their tracking interests. The lower the valuation, the less the Litman and Diener family members had to pay for the tracking interests. 4. KPMG's "Review" Of The Mitchell 2000 Valuation

The Litmans and Dieners are expected to argue that KPMG reviewed and concurred with the Mitchell valuation of the 2000 IPO Shares. Hotels.com believes any testimony concerning such "review" is inadmissible hearsay.14 Nevertheless, should any evidence of such review be

14

Under the Court's Order, motions in limine are not due until April 5, 2007. 19

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admitted, it is important to understand the nature of KPMG's purported "review" and "concurrence." Diener's contact at KPMG, James Horan, apparently faxed to an airport Hilton a draft version of the 2000 Mitchell valuation. The recipient of the fax was a Mr. Nicholson, whom Horan did not know and had never met, but who is allegedly a member of KPMG's valuation practice. Nicholson was apparently attending a conference at the airport hotel. While Nicholson was still at the conference, likely the day after he received the fax, he allegedly told Horan that he thought the valuation was "reasonable." Horan had no idea how much time Nicholson spent reviewing the valuation or what, if anything, he did to evaluate it. Mr. Nicholson did not provide Horan with any written analysis or documentation. B. Hotels.com's Tax Returns

USA retained Ernst & Young ("EY") to prepare HRN's 2000 return for the short year beginning March 1, 2000 and ending on December 31, 2000.15 EY prepared the return, reporting amortization deductions based on the $158,998,400 total additional purchase price negotiated under the Amended and Restated Asset Purchase Agreement. The amortization deductions were based on a spreadsheet prepared by an HRN employee which shows that the claimed amortization period began on February 25, 2000. EY also prepared a Form 8594 Asset Acquisition Statement, which is required when an asset acquisition is completed. This Form, as prepared by EY, was consistent with the Amended and Restated Asset Purchase Agreement and Litman's and Diener's statements to the SEC. Because HRN was no longer part of USA's consolidated group as of March 1, 2000, HRN's separate tax return had to be signed by someone from HRN. Diener, who was the person
15

Only the 2000 taxable years of the parties are before the Court of Federal Claims. However, because the value of the stock represents additional goodwill that Hotels.com is entitled to amortize and deduct over a number of years, this issue impacts Hotels.com's subsequent tax years as well. 20

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at HRN ultimately responsible for HRN's tax matters, directed HRN's Vice President of Finance, Viren Gandhi, to sign the return. However, before the return was filed, Diener directed Gandhi to "white out" the information on the Form 8594 that set forth the value of the additional, contingent purchase price paid to the Litmans and Dieners. No one informed USA of this action at the time. In fact, Hotels.com's records did not contain a copy of the 2000 HRN tax return with the Form 8594 whited out. Hotels.com did not learn of the actions directed by Diener until counsel for the United States questioned the copy of the return attached to Hotels.com's Complaint and provided Hotels.com with a copy of the whited out form. Although Diener's order to white out certain information on the Form 8594 was complied with, the HRN return, as filed with the IRS, nevertheless reported amortization deductions based on the $159,998,400 of additional purchase price paid and the beginning amortization date of February 25, 2000.16 Around the time that the HRN return was filed, USA learned that Litman and Diener were not reporting the agreed-to value in their tax returns. Because the parties were not reporting the same value, USA knew that the IRS would focus on this issue. USA retained Deloitte & Touche ("DT") to prepare a quick valuation. DT was asked to complete its analysis in less than a week. DT determined that a weighted average discount of approximately 33 percent was reasonable. DT used February 25, 2000 as the valuation date. In computing the discount, DT assumed that the share price "as of February 25, 2000 was $16.50." In fact, the closing share price on that date was $26 and the weighted-average price was $25.1030. DT did

16

This date is incorrect. It should have been March 1, 2000, the first day of HRN's short tax year for 2000. But, in any event, the employee who prepared the schedule did not use February 24, 2000 as the date HRN paid the additional deferred purchase price. 21

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not determine a total value for the Shares at issue or state the share price to which its computed discount should be applied. Hotels.com is not relying on the DT valuation in this litigation.17 C. The IRS Audits And Subsequent Litigation

The IRS did, indeed, audit the Litmans', Dieners', and Hotels.com's 2000 tax returns. The Litmans and Dieners refused to extend their statutes of limitation on assessment. As a result, the IRS issued Notices of Deficiency to the Litmans and Dieners in October 2004. Those Notices of Deficiency reflect a total value of consideration received by the Litmans and Dieners of $159,998,400. The Litmans and Dieners paid the deficiencies asserted by the IRS and filed claims for refund. Neither the Litmans nor the Dieners requested that the IRS deny their refund claims. The Litmans and Dieners filed suit in this Court on August 30, 2005 and September 7, 2005, respectively, and the Court consolidated their cases. Hotels.com extended its statute of limitations on assessment until December 31, 2006. On February 10, 2006, the IRS issued a Notice of Deficiency to Hotels.com reflecting the total $45,437,822 value used by the Litmans and Dieners. Hotels.com paid the deficiency on March 9, 2006, filed a claim for refund on March 16, 2006, and, by letter of the same date requested that the IRS deny its claim for refund under the provisions of Internal Revenue News Release IR1600. The IRS issued its denial on March 30, 2006. On April 10, 2006, Hotels.com filed suit

17

Certain later year HRN returns adjusted HRN's claimed amortization deductions downward. The position taken on these returns is not determinative of value. A tax return position, while an admission, may not be resorted to for determining market value unless there is an absence of other evidence to the contrary. Grill v. United States, 157 Ct. Cl. 804, 812-13 (1962). It is clear beyond cavil that in this case there is determinative valuation evidence to the contrary. Moreover, Hotels.com has filed protective amended returns reflecting its originally claimed basis in the additional goodwill as dictated by the terms of the Amended and Restated Asset Purchase Agreement. In addition, because Diener was ultimately in charge of taxes at HRN during 2000 and he directed the actions of the HRN employee who signed the 2000 HRN return, the position taken on the 2000 tax return (i.e., the value of the additional purchase price paid was $159,998,400) is an admission against him. 22

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in this Court. By Order dated April 27, 2006, Hotels.com's case was consolidated with the Litmans' and Dieners'. VI. THE TRIAL EXPERTS As indicated above, the testimony of trial experts is only relevant to Hotels.com's alternative position. A. The Litmans' And Dieners' Expert

Mitchell remains the Litmans' and Dieners' expert in this litigation. In his trial report, Mitchell either selected or was told to use February 24, 2000 as the valuation date. As in his 2000 Report, he states that a willing-buyer/willing-seller analysis is appropriate. However, unlike his 2000 Report, his trial report provides dollar values for the stock. In his deposition, Mitchell stated that he computed a value for the stock at the request of Mr. Porter, counsel for the Litmans and Dieners. In his trial report, Mitchell subtracts his computed discount from the $16 per share IPO price, but provides no support for why, in his view, this was the appropriate starting point or why that price satisfies his own definition of the arm's length price for freely tradable HRN shares. Mitchell did not consider any of the HRN IPO's pre-opening stock activity. Mitchell's average per share discount remains at approximately 70 percent, resulting in an average per share price of $4.53, or $45,437,823 in the aggregate. B. The United States' Expert

The United States retained Francis X. Burns as its expert. Burns used February 24, 2000 as the valuation date at the instruction of his counsel and did not make an independent determination of the appropriate valuation date. He also used the $16 per share IPO price as a starting point, and his report, like Mitchell's, provides no support for why he chose this price. Burns did not consider any of the HRN IPO's pre-opening stock activity.

23

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Burns determined a discount of approximately 20.3 percent and, therefore, valued the 2000 IPO Shares at $12.75 per share, or an aggregate of $127,498,725.18 In his deposition, however, Burns agreed that if the valuation date were after the HRN stock started to trade, he believed that the market price of the stock would likely be the starting point to which he would apply a discount. C. Hotels.com's Expert

Hotels.com retained Dr. Mukesh Bajaj as its expert. Dr. Bajaj has testified both for taxpayers and the government and his opinions and studies have been relied upon in numerous cases. Dr. Bajaj valued the 2000 IPO Shares as of three different dates ­ March 1, 2000, February 25, 2000, and February 24, 2000. The date used does not materially impact Dr. Bajaj's conclusion that the fair market value of the Section 7.15 and Section 7.11.3 Shares, including all restrictions, is in excess of the $16 per share IPO price if the analysis is done using accepted valuation techniques and theories correctly applied. Given that the Litmans and Dieners were not entitled to receive the Section 7.15 Shares until the "initial closing" of the IPO, which occurred on March 1, 2000, or the Section 7.11.3 Shares until the IPO was "consummated," i.e., March 1, 2000, Dr. Bajaj was instructed to use March 1, 2000 as his primary valuation date.19 Dr. Bajaj concluded that a maximum discount of 20 percent should be applied to account for the various restrictions to which the Section 7.15 and Section 7.11.3 Shares were subject. On March 1, no guesswork or judgment is involved in

18

Burns originally determined that the value was $11.10 per share. However, he filed an addendum to his report to correct a mathematical error. In the addendum, the corrected valuation is $12.75.

19

Again, any valuation analysis is solely in connection with Hotels.com's alternative legal arguments. 24

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determining the value of freely tradable shares of HRN. Starting with the $26.25 closing price for HRN stock on March 1, 2000, Dr. Bajaj determined that the fair market value of the Section 7.15 and Section 7.11.3 Shares was $21 per share, or $209,997,900 in the aggregate. Because February 25, 2000 had been used as a valuation date by others, Dr. Bajaj was instructed to value the Shares as of that date as well. Again, no judgment or guesswork was required to determine the willing buyer-willing seller starting point because that share price was set by the market. Using the $26 per share closing price of HRN stock on February 25, 2000 and applying Dr. Bajaj's 20 percent discount would result in a per share value of $20.80, or $207,997,920 in the aggregate. Even if a February 24, 2000 valuation date were used, Dr. Bajaj would still apply a 20 percent discount. However, unlike Mitchell or Burns, his analysis did not begin with the $16 per share IPO price. In Dr. Bajaj's opinion, that price is not the fair market value of freely tradable HRN shares because it is not the price at which a willing buyer would buy and a willing seller would sell freely tradable shares mere hours before the stock actually began trading on the NASDAQ. In Dr. Bajaj's opinion, the "pre-open bid and offer prices" on the HRN stock provide the best evidence of the market price of the HRN stock as of February 24, 2000. Those prices started at $23 and $27, respectively, well above the $16 per share IPO price. Thus, if valued as of February 24, 2000, beginning with the $23 pre-open bid price and applying a 20 percent discount, the minimum justifiable value for the Section 7.15 and Section 7.11.3 Shares was $18.40 per share, or $183,998,160 in the aggregate. CONTENTIONS OF LAW 1. § 7422. 2. All conditions precedent to the jurisdiction of the Court have been satisfied. This Court has jurisdiction over this action pursuant to 28 U.S.C. § 1491 and 26 U.S.C.

25

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3.

The Amended and Restated Asset Purchase Agreement establishes the value of the

additional, deferred purchase price paid by HRN to the Litmans and Dieners. 4. The value of the 5,100,000 Section 7.15 Shares is equal to the value of the contingent

earn out rights for which they were exchanged. The parties agreed that the contingent earn out rights, and therefore the value of the Section 7.15 Shares, taking into account all restrictions to which such Shares were subject, was $81,600,000. As a matter of law, the value of the Section 7.15 Shares is $81,600,000. 5. The parties agreed that the value of the 4,899,900 Section 7.11.3 Shares was to be

computed based on the IPO Price. The IPO Price was $16 per share. Thus, they agreed that the value of those Shares, taking into account all restrictions, was $78,398,400. As a matter of law, the value of the Section 7.15 Shares is $78,398,400. 6. As a matter of law, Hotels.com paid additional deferred purchase price to the Litmans

and Dieners in the total amount of $159,998,400, which represents additional goodwill that Hotels.com is entitled to amortize. 7. In the alternative, if the Amended and Restated Asset Purchase Agreement is not found to

be controlling as to the issue before this Court, the restricted HRN stock must be valued as of the date the Litmans and Dieners obtained beneficial ownership of the stock using accepted valuation techniques properly applied. 8. The date on the stock certificate is not controlling as to when the Litmans and Dieners

obtained beneficial ownership of the restricted HRN stock. 9. The completion of an IPO was a condition precedent to the Litmans' and Dieners'

entitlement to receive the restricted HRN stock. Thus, as a matter of law, the Litmans and

26

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Dieners obtained beneficial ownership of the restricted HRN stock on March 1, 2000, the date of the IPO's closing. 10. The fair market value of the restricted HRN stock is the amount a willing buyer would

pay and a willing seller would accept for an unrestricted share o