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We have recommended to Doug Saunders that InterTAN
Canada Ltd. (Canada) [ITC] pay a dividend of $20 mil-
lion (U.S.) to InterTAN, Inc. (ITI) [petitioner]. Our
recommendation was based upon a number of scenarios
regarding Canada’s current year loss and the balance in
Canada’s post-1986 pool of earnings and profits (E&P).
We have considered the dividend’s consequences based
upon E&P calculated under what we consider to be the
correct methods as well as E&P calculated consistently
with the methods used in prior years, some of which we
believe to be improper. Our calculations and recommen-
dation are based upon the Company’s best estimates of
income (loss) for Canada and ITI available at this
time.
With a $20 million dividend from Canada, ITI’s U.S. tax
for the fiscal year ending June 30, 1993 will be ap-
proximately $1.2 million. Without the dividend and the
benefit of the associated deemed paid foreign tax
credits, ITI’s U.S. tax liability will be approximately
$4.9 million. In the “best case” dividend scenario,
ITI will have approximately $3.3 million of excess
credits.
* * * * * * *
In order to avoid the Canadian withholding tax, the
Company plans to structure the transaction as a return
of capital for Canadian tax purposes while still being
considered a dividend for U.S. tax purposes. The
Company plans to take the following action:
1. Canada will borrow $20 million (U.S.) from
the bank and repay a portion of its debt owed
to ITI.
2. ITI will use the $20 million to purchase a
new class of preferred stock issued by Can-
ada.
3. Canada will redeem the preferred stock for
$20 million. It is imperative that this step
be accomplished before the end of the fiscal
year.
4. After the end of the fiscal year, ITI will
make a new loan to Canada.
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