Compaq Computer Corporation and Subsidiaries - Page 1


                                   113 T.C. No. 17                                    

                               UNITED STATES TAX COURT                                

                             COMPAQ COMPUTER CORPORATION                              
                           AND SUBSIDIARIES, Petitioner v.                            
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 24238-96.               Filed September 21, 1999.           

                    In a prearranged transaction designed to eliminate                
               typical market risks, P purchased and immediately                      
               resold American Depository Receipts (ADR's) of a                       
               foreign corporation on the floor of the NYSE.  As a                    
               result of the transaction, P was the shareholder of                    
               record of 10 million ADR's on the dividend record date                 
               and received a dividend of $22,545,800 less withheld                   
               foreign taxes of $3,381,870.  P also recognized a                      
               $20,652,816 capital loss on the sale of the ADR's,                     
               which was offset against previously  realized capital                  
               gains.  The net cash-flow from the transaction, without                
               regard to tax consequences, was a $1,486,755 loss.                     
               Held:  The transaction lacked economic substance, and                  
               the foreign tax credit claimed by P will be disallowed.                
               Held further:  An accuracy-related penalty will be                     
               imposed due to petitioner's negligence.                                

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