Wally Findlay Galleries International, Inc. and Subsidiaries - Page 22

                                       - 22 -                                         

               Another serious weakness in petitioners' defense of the                
          deduction lies in the failure to take account of the important              
          effects of the exchange rate, both in the diagnosis of the French           
          subsidiary's financial difficulties during the years at issue and           
          in the forecast of its capacity to repay the debt thereafter.  On           
          the balance sheets of the French subsidiary asset values were               
          converted into U.S. dollars at the current exchange rates as of             
          the fiscal yearend.  Although most of the subsidiary's                      
          liabilities were denominated in francs, the cost of sales                   
          reflected in the intercompany account, which constituted by far             
          the largest liability, was fixed in U.S. dollars at the time of             
          sale.  As a result, the value of assets, and shareholder's                  
          equity, exhibited a high degree of sensitivity to changes in the            
          value of the franc vis-a-vis the U.S. dollar.  Between 1981 and             
          1985 the U.S. dollar rose dramatically against the franc, as well           
          as against most other major currencies.  This depressed the U.S.            
          dollar value of the French subsidiary's assets and its equity.              
          The effect on the book value of the premium lease is particularly           
          noteworthy.  The balance sheet for FY 1984 reports the book value           
          of the lease as $155,671, using an exchange rate of 9.284                   
          FF per U.S. dollar.  The rates used in preparation of the                   
          subsidiary's balance sheets during the 5-year period FY 1977-81,            
          before the tremendous appreciation of the U.S. dollar, were in              
          the range of 4.0 to 5.5.  At a rate of 5.0, the book value of the           

Page:  Previous  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  28  Next

Last modified: May 25, 2011