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consultations with the New York office of Arthur Andersen and
with Colgate, in February 1990, the audit engagement manager
briefed his colleague on the status of the problem:
Colgate does not want the cost to sell of US
$1,093,750 * * * in the November 30, 1989
income statement of ACM. The reasons are
mainly tax driven, as inclusion might set the
IRS on top of the reasons why the partnership
was constructed in the first place and thus
the planned tax losses may be denied by the
IRS. We, in cooperation with Steve Rossi of
our New York office, were requested to think
with Colgate in order to keep the cost to
sell out of the balance sheet. [Emphasis
added.]
One proposal under consideration was as follows:
Leave the LIBOR notes on the balance sheet as
they are and reason that one third of the
notes will be distributed to Colgate by 1990
and that the remainder of the notes is
eventually for the account of Colgate too.
This would require a side letter to the
partnership agreement stating that the LIBOR
notes are the one exception to the valuation
rules which now state valuation at market and
would state valuation at market and would
then state valuation at market increased by
the cost to sell the original Citicorp notes.
The partnership followed this approach. Pursuant to the
"Summary of Financial Accounting Policies" (Accounting Policies),
adopted 2 weeks later at the fourth partnership meeting, the
LIBOR Notes would be:
carried on the books of the Partnership at cost, and
adjusted * * * (I) for amortization of principal on a
straight-line basis; and (ii) for movements in interest
rates upon the following events: (a) distribution of
any * * * [LIBOR] notes; (b) redemption of any Partner;
and liquidation of the Partnership.
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