InterTAN, Inc. - Page 12

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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                  
               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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