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DISCUSSION AND ANALYSIS
1. The dividend from Canada is expected to make sig-
nificant deemed paid foreign tax credits available
to ITI. Therefore, it is reasonable to expect the
IRS to review the transaction. Under the step
transaction doctrine, the IRS may be able to chal-
lenge the validity of the dividend and the deemed
paid foreign tax credits with two arguments.
The economic situations of both ITI and Canada are
the same after transaction [sic] as they were
before the transaction. Canada has an obligation
due to ITI both before and after the transaction.
In addition, the cash ends up back in Canada after
ITI makes the new loan. Therefore, the IRS may
attempt to take a position stating that the entire
transaction is simply a sham undertaken to gener-
ate deemed paid foreign tax credits for ITI. To
the extent the amounts in each step of the trans-
action are comparable and the length of time laps-
ing between each step is short, the IRS will be
able to build a better case for this position.
To gain a better understanding of the likelihood
of the IRS challenging the transaction under the
step transaction theory, we contacted Larry
Portnoy and Tom Bretz/PW-WNTS who helped develop
the series of steps to accomplish the transaction.
They did not think there would be a problem with
the transaction structured in this manner. Tom
Bretz also suggested using different dollar
amounts in each step of the transaction. He also
mentioned spreading the steps out over some length
of time. In particular, he thought it important
to make the new loan after the end of the fiscal
year.
On June 30, 1993, prior to the actions described below which
took place on that date, ITC’s account, number 302-8529-6 (ITC’s
Royal Bank account), at the Royal Bank of Canada (Royal Bank) had
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