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While asserting that it made a "real" payment to the
Netherlands in the form of the $3,381,870 withheld tax,
petitioner contends that that withholding tax should be
disregarded in determining the U.S. tax effect of the transaction
and the economic substance of the transaction. Respondent,
however, persuasively demonstrates that petitioner would incur a
prearranged economic loss from the transaction but for the
foreign tax credit.
The following cash-flow analysis demonstrates the inevitable
economic detriment to petitioner from engaging in the ADR
transaction:
Cash-flow from ADR transaction:
ADR purchase trades ($887,577,129)
ADR sale trades 868,412,129
Net cash from ADR transaction ($19,165,000)
Cash-flow from dividend:
Gross dividend 22,545,800
Netherlands withholding tax (3,381,870)
Net cash from dividend 19,163,930
OFFSETTING CASH-FLOW RESIDUAL (1,070)
Cash-flow from transaction costs:
Commissions (1,000,000)
Less: Adjustment 1,071
SEC fees (28,947)
Margin writeoff 37
Interest (457,846)
Net cash from transaction costs (1,485,685)
NET ECONOMIC LOSS ($1,486,755)
The cash-flow deficit arising from the transaction, prior to use
of the foreign tax credit, was predetermined by the careful and
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