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second warrant, after taking into account underwriting costs and
other expenses of the sale.
Tax Return and Financial Reporting Treatment of the Sale of
the Warrants
On its Federal income tax return for its 1987 taxable year,
CV reported part of the gain on disposition of the second warrant
as a reduction in its cost of goods sold and part as a long-term
capital gain. CV computed a capital gain from the sale of the
second warrant of $1,179,578 by subtracting from the $3,002,750
net sale proceeds an "adjusted basis" of $1,823,172. The
“adjusted basis” represented the amount that CV would have
realized had it disposed of the second warrant when the warrant
first became exercisable and which CV treated in its tax return
as a reduction in CV’s cost of goods sold (i.e., as a discount in
the price paid by CV for goods purchased from Sun).
On its Form 10-Q for the quarter ended March 31, 1987, filed
with the Securities and Exchange Commission (SEC), CV reported a
$4.7 million gain
from the sale of stock and warrants that had been received
in conjunction with a convertible loan and a volume purchase
agreement. The portion of the gain attributable to the
volume purchase rebate ($1.4 million) was accounted for as a
favorable purchase price variance and included in the cost
of goods sold. The remaining $3.3 million gain on the sale
of stock and warrants has been reflected in other income
(net).
On its Form 10-Q for the quarter ended June 30, 1987, filed
with the SEC, CV also reported that it had received during the
first quarter of the year gain from the sale of common stock and
warrants that had been received in conjunction with a convertible
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