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determine whether ITC had sufficient earnings and profits to pay
a dividend to petitioner that would generate sufficient foreign
tax credits to minimize petitioner’s anticipated tax liability
for its taxable year ended June 30, 1993. ITC’s E&P study was
very complex and time-consuming.7
On January 13, 1993, Mr. Bond prepared on behalf of Mr.
Thorpe a Price Waterhouse interoffice memorandum addressed to
Cullen Duke of Price Waterhouse’s Houston office (January 13,
1993 interoffice memorandum) regarding the viability of ITC’s
paying a dividend to petitioner. Mr. Thorpe reviewed and ap-
proved that memorandum. The January 13, 1993 interoffice memo-
randum stated in pertinent part:
Our planning idea involves paying another dividend from
InterTAN Canada [ITC] to generate deemed paid credits
that the U.S. parent [petitioner] can use to offset the
tax on the Subpart F income. Since InterTAN Canada
will have a deficit in its post-1986 E&P pool, the
dividend will have to be paid out of pre-1987 E&P.
When a foreign corporation pays a dividend when there
is a deficit in its post-1986 E&P pool, Notice 87-54
requires the deficit be carried back to offset E&P in
pre-1987 years. If InterTAN Canada’s deficit in its
post-1986 E&P pool is within a certain range, InterTAN
Canada will be able to pay a small dividend out of 1985
E&P and bring up approximately $8 million of deemed
paid foreign taxes. If the deficit in the post-1986
E&P pool is too small, the effective tax rate on the
1985 E&P that remains after carryback of the deficit
7The complexity of ITC’s E&P study related, inter alia, to a
deficit in ITC’s post-1986 earnings and profits pool and certain
losses of ITC that had been carried back to its prior taxable
years and had thereby created refunds. Such refunds complicated
the calculation of ITC’s post-1986 foreign income taxes and post-
1986 undistributed earnings.
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