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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
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