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principal and accrued interest due on the note (i.e., principal
of �29,498,525, then equivalent to $45,811,209, and accrued
interest of $3,973,672). The note assumption agreement further
provided that CIC remained liable to Holdings but had recourse
against CIHI if CIHI defaulted. CIHI performed all of its duties
pursuant to the terms of the agreement. Holdings was not a party
to the agreement.
The dollar gained value relative to the pound from the date
Holdings and CIC executed the note (i.e., on October 7, 1988, $1
was equivalent to �.59050) to the date CIHI assumed the note from
CIC (i.e., on June 28, 1996, $1 was equivalent to �.6460). On
the latter date, CIC realized a $4,188,791 foreign exchange gain
(i.e., on June 28, 1996, CIC could have repaid the principal
balance of �29,498,525 with $45,811,209 rather than $50 million).
Petitioners, on their 1996 consolidated return, which included
CIC and CIHI, reported the foreign exchange gain and, pursuant to
section 1.1502-13, Income Tax Regs., deferred recognition of the
gain as an intercompany transaction (i.e., a transaction between
corporations that are members of the same consolidated group).
On June 2, 1999, and August 30, 2000, respondent issued
notices of deficiency to petitioners relating to tax years ending
September 30, 1993, 1994, and 1995,8 and 1996, respectively, and
determined the following deficiencies in Federal income taxes:
8 The 1995 taxable year is no longer at issue.
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