InterTAN, Inc. - Page 6

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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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