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year before taking income from discharge of indebtedness into
account. Foreign exchange losses were again a substantial
component. The financial statements also showed that the company
was technically insolvent by $26,228 even after cancellation of
the intercompany debt. In no previous year had liabilities to
third parties exceeded assets. In March 1985 WFGI received the
results of an “accrual review” performed by its accountants to
determine an appropriate provision for taxes on the consolidated
financial statements for FY 1984. In the opinion of the
accountants, after cancellation of the intercompany debt the
subsidiary remained insolvent on a “fair market value liquidation
basis” as of September 30, 1984. In other words, if the assets
were sold at their fair market value, the amount realized would
not be sufficient to satisfy the remaining debts to third
parties. There is no indication that an independent appraisal
was performed to ascertain the fair market value of the assets.
Rather, the result turned on a determination that the book value
of the assets was not likely to understate their fair market
value by more than the “couple hundred thousand dollars” of
additional liabilities for administrative and legal costs,
severance payments, Social Security, taxes and the like, that
would be incurred in a liquidation. The conclusion of the
accrual review was that it would be reasonable for tax purposes
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