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weighing of the relative potential for prejudice to petitioners
and to respondent convinces us that justice will be better served
by allowing leave to amend.
First, before addressing more substantive matters, we make a
practical observation. Petitioners allege that the estimated
cost to each of the four moving parties, if deductions for the
$1,292,699 paid apiece in Israeli income taxes are denied, will
be more than $1 million in additional U.S. tax, interest, and
penalties. (The $1,292,699 figure derives from adding the
$296,554, $704,450, and $291,695 in taxes paid by each moving
party in 1991, 1992, and 1994, respectively.) The economic
impact of our decision thus will not be insignificant.
We now turn to the substance underlying the relief claimed
and its relationship to the record developed in this case. As
explained in our earlier opinion, payment of taxes to a foreign
government may give rise to either a deduction or a credit. See
secs. 164, 901. Section 164(a)(3) provides that a deduction is
allowed for foreign income taxes. In lieu of this deduction,
section 901(a) and (b)(1) permits a taxpayer to elect a credit
for foreign income taxes.
Subject to limited exceptions not relevant here, the
deduction and credit provisions operate on a mutually exclusive
basis with respect to a particular tax year. See sec.
275(a)(4)(A). A taxpayer is precluded from deducting foreign
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