Wally Findlay Galleries International, Inc. and Subsidiaries - Page 11

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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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