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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