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corporation" (CFC) for purposes of section 957(a), and AII was
the "United States Shareholder" of AG for purposes of section
951(b). Under subpart F of the Code, the net subpart F income
derived by AG during the taxable year was currently includable in
petitioner's gross income. Sec. 951(a).
In the ordinary course of AG's business, AG derived income,
incurred expenses, acquired assets, and recorded liabilities
denominated in currencies other than the U.S. dollar, which was
its functional currency for Federal income tax purposes. For
1986, AG's assets included loans to affiliated companies
denominated in British pounds sterling (�), German Deutsche marks
(DM), and Italian lira. Foreign currency denominated assets and
liabilities resulted in AG's realization of foreign currency
gains and losses in the ordinary course of its business, due to
fluctuations in the value of foreign currencies with respect to
the dollar, which gains and losses cannot be ascertained in
advance.
For 1986, AG's assets consisted of the following:
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