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French subsidiary's prospects. This had the same effect as an
assumption that the franc would not recover significantly against
the dollar in the foreseeable future. The record does not
disclose the reasons why they may have discounted this
possibility nor that they considered it at all. Petitioners have
made no attempt to defend this assumption. In retrospect, of
course, we know it to be incorrect. It may be that the peaking
and steep decline of the U.S. dollar, beginning in 1985, could
not reasonably have been anticipated on the basis of information
available to the officers of WFGI at the time they decided to
write off the intercompany debt. The point is not that they
lacked perfect foresight, but that they seem to have neglected to
make a reasoned forecast.
They were not unaware of the powerful effect of exchange
rate instability on the subsidiary's finances. During the years
at issue, the losses that the French subsidiary sustained on
currency exchange transactions were duly noted by the
subsidiary's auditors and reported in the consolidated financial
statements. Promotional material prepared for investors blamed
the subsidiary's financial difficulties on “the french economic
situation and of [sic] losses on rates of exchange”. Yet, the
officers' analysis of the subsidiary's situation for tax purposes
made no mention of the influence of exchange rates, a factor
deserving attention in the exercise of sound business judgment.
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