InterTAN, Inc. - Page 11

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               Doug Saunders believes this will permit the Company to                 
               avoid the Canadian withholding tax since the transfer                  
               of funds to the U.S. should not constitute a dividend                  
               for Canadian tax purposes.  Whereas, the U.S. tax laws                 
               rely more on substance, the Canadian tax laws rely                     
               heavily on form.                                                       
               Sometime after June 15, 1993, and before June 28, 1993, Mr.            
          Bond prepared a memorandum to petitioner’s tax file (Mr. Bond’s             
          draft June 1993 file memorandum).8  Mr. Bond’s draft June 1993              
          file memorandum, which was not finalized until July 9, 1993,                
          stated in pertinent part:                                                   
               During the fiscal year ending June 30, 1993, Canada                    
               [ITC] will pay a dividend to ITI [petitioner].  It may                 
               be possible to avoid Canadian withholding tax on the                   
               dividend if the paid-up capital of Canada can be in-                   
               creased prior to the payment of the dividend.  In order                
               to increase Canada’s paid-up capital before paying the                 
               dividend the transaction will be accomplished according                
               to the following steps:                                                
                    1.   Canada will repay the loan from ITI.                         
                    2.   ITI will recontribute the cash to Canada.                    
                    3.   Canada will pay the dividend.                                
                    4.   ITI will make a new loan to Canada.                          
                  *       *       *       *       *       *       *                   
               1.   The various steps involved in the transaction                     
                    should be respected for U.S. tax purposes.  How-                  
                    ever, it will be beneficial to spread the steps                   
                    over time and vary the amounts involved in each                   

               8Mr. Saunders did not review Mr. Bond’s draft June 1993 file           
          memorandum prior to the trial in this case.                                 

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Last modified: May 25, 2011