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