Square D Company and Subsidiaries - Page 6




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          provide for payment of principal and interest to be subordinated            
          to payment in full of all amounts outstanding under the bank                
          loans.  The agreement for the bank loans in general prohibits any           
          payment of principal or interest on the Subordinated Loans before           
          January 1, 1994.                                                            
               Petitioner did not make any interest payments under the 1991           
          or 1992 Subordinated Loans during the years in issue.  Rather,              
          petitioner accrued interest on the 1991 and 1992 Subordinated               
          Loans during the years in issue as follows:                                 
          Accrual year   1991 Sub’d Loans   1992 Sub’d Loan        Total              
          1991          $21,075,101                          $21,075,101              
          1992           35,710,584        $2,831,111         38,541,695              
          The 1991 and 1992 Subordinated Loans constituted debt for U.S.              
          Federal income tax purposes.                                                
               Schneider, MGSA, TESA, and SNC were not engaged in a trade             
          or business within the United States for U.S. Federal income tax            
          purposes during the years in issue.  Interest accrued by                    
          petitioner had the following characteristics:  (i) It was not               
          includible in the gross incomes of Schneider, MGSA, TESA, or SNC            
          for U.S. Federal income tax purposes; (ii) it was from sources              
          within the United States for U.S. Federal income tax purposes;              
          and (iii) it was not effectively connected with the conduct of a            
          U.S. trade or business for U.S. Federal income tax purposes.                
          During the years in issue, petitioner and the Schneider Lenders             







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