Compaq Computer Corporation and Subsidiaries - Page 13




                                       - 13 -                                         

               in income taxes is obvious--Compaq realized a net                      
               profit with respect to the Royal Dutch ADR arbitrage.                  
               That net profit, appropriately, was subject to tax.                    
          Petitioner's calculation of its alleged profit is as                        
          follows:                                                                    
          ADR transaction:                                                            
               ADR purchase trades           ($887,577,129)                           
               ADR sale trades                 868,412,129                            
          Net cash from ADR transaction                ($19,165,000)                  
          Royal Dutch dividend                              22,545,800                
          Transaction costs                                 (1,485,685)               
          PRETAX PROFIT                                      $1,895,115               
          Petitioner asserts:                                                         
                    Stated differently, the reduction in income tax                   
               received by the United States was not the result of a                  
               reduction in income tax paid by Compaq.  Each dollar of                
               income tax paid to the Netherlands was just as real,                   
               and was the same detriment to Compaq, as each dollar of                
               income tax paid to the United States.  Even                            
               Respondent's expert acknowledged this detriment, and                   
               that Compaq's worldwide income tax increased as a                      
               result of the Royal Dutch ADR arbitrage.  A "tax                       
               benefit" can be divined from the transaction only if                   
               the income tax paid to the Netherlands with respect to                 
               Royal Dutch dividend is ignored for purposes of                        
               computing income taxes paid, but is included as a                      
               credit in computing Compaq's U.S. income tax liability.                
               Such a result is antithetical to the foreign tax credit                
               regime fashioned by Congress.                                          
                    In the complete absence of any reduction in income                
               tax, it is readily apparent that Compaq could not have                 
               engaged in the transaction solely for the purpose of                   
               achieving such an income tax reduction.                                
          Petitioner's rationale is that it paid $3,381,870 to the                    
          Netherlands through the withheld tax and paid approximately                 
          $640,000 in U.S. income tax on a reported "pretax profit" of                
          approximately $1.9 million.  (The $640,000 amount is petitioner's           





Page:  Previous  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  21  22  Next

Last modified: May 25, 2011