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The loan agreement identified GXE as the sole lending party. GXE
submitted a Form W-8, Certificate of Foreign Status, dated
March 20, 1990, to petitioner in connection with the loan.
On August 18, 1994, GITIC agreed to lend petitioner $2
million. The GITIC loan agreement provided for a 2-year term and
interest payments at a rate of 10 percent for the first year and
a predetermined market rate for the second year. Guo-Qing Tan
also signed the GITIC loan agreement on behalf of petitioner, and
Yao-Wei Xu signed on behalf of GITIC. On or about August 23,
1994, petitioner exercised its right to borrow $2 million under
the GITIC loan agreement. GITIC wired net loan proceeds of
$1,988,000 to petitioner on or about the same day.6
On its Forms 1120, U.S. Corporation Income Tax Return, for
1994, 1995, and 1996, petitioner claimed deductions for interest
it allegedly paid during those years. Two tax return preparers,
Mr. Steinhardt and Mr. Choy, assisted in the preparation of the
Forms 1120. Petitioner attached Form 5472, Information Return of
a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation
Engaged in a U.S. Trade or Business, to its 1994 Form 1120.
Petitioner, however, did not attach Form 5472 to its Forms 1120
for 1995 or 1996.
6The net loan amount was calculated by subtracting bank and
service fees of $12,000 from the $2 million GITIC loan amount.
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