                           T.C. Memo. 2004-1



                       UNITED STATES TAX COURT



                  INTERTAN, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9599-02.               Filed January 5, 2004.



     Raymond P. Wexler and David C. Kung, for petitioner.

     James M. Cascino, David B. Flassing, and John J. Comeau, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:   Respondent determined to impose a
                                 - 2 -

$1,000,8191 accuracy-related penalty under section 6662(a)2 on

petitioner for its taxable year ended June 30, 1993.   The only

issue for decision is whether petitioner is liable for that

penalty.   We hold that it is.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     Petitioner is a Delaware corporation with its principal

office in Ontario, Canada.

     At all relevant times, petitioner, which was formed in 1986

as part of a reorganization and spinoff of Tandy Corporation, was

a holding company.   At such times, petitioner owned stock in

various wholly owned foreign operating subsidiaries (petitioner’s

operating subsidiaries), including InterTAN Canada Ltd. (ITC), a

Canadian corporation, InterTAN U.K. Limited (InterTAN U.K.), and

InterTAN Europe S.A. (InterTAN Europe).

     On May 22, 1990, petitioner, as guarantor, and ITC, InterTAN

U.K., and InterTAN Europe, as borrowers, entered into an agree-

ment entitled “REVOLVING CREDIT AND TERM LOAN AGREEMENT” (the

1990 bank agreement) with a syndicate of banks (bank syndicate),

as lenders.   During a period of time not disclosed by the record,



     1
      Unless otherwise noted, currency amounts are denominated in
United States dollars.
     2
      All section references are to the Internal Revenue Code in
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
                               - 3 -

the bank syndicate extended a revolving credit facility (revolv-

ing credit facility) to certain of petitioner’s operating subsid-

iaries and extended a $40 million term loan (term loan) to its

operating subsidiary ITC.   As of June 30, 1993, petitioner’s

operating subsidiaries were in default under the 1990 bank

agreement, and fr76,000,000 (approximately $14,179,000) under the

revolving credit facility and $40 million under the term loan

were due and payable.3

     On June 25, 1992, petitioner executed a document entitled

“GUARANTEE AND POSTPONEMENT OF CLAIM” (guarantee and assignment

agreement).   The guarantee and assignment agreement provided in

pertinent part:

          FOR VALUABLE CONSIDERATION, receipt hereof is
     hereby acknowledged, the undersigned and each of them
     (if more than one)[4] hereby jointly and severally
     guarantee(s) payment on demand to Royal Bank of Canada
     (hereinafter called the “Bank”) of all debts and lia-
     bilities, present or future, direct or indirect, abso-
     lute or contingent, matured or not, at any time owing
     by InterTAN Canada Ltd. (hereinafter called the “cus-
     tomer”) [ITC] to the Bank or remaining unpaid by the
     customer to the Bank, heretofore or hereafter incurred
     or arising and whether incurred by or arising from
     agreement or dealings between the Bank and the customer
     or by or from agreement or dealings with any third
     party by which the Bank may be or become in any manner
     whatsoever a creditor of the customer or however other-
     wise incurred or arising anywhere within or outside the
     country [Canada] where this guarantee is executed and


     3
      The record does not disclose whether petitioner was liable
as of June 30, 1993, as guarantor under the bank agreement.
     4
      Petitioner was the only signatory to the guarantee and
assignment.
                                - 4 -

     whether the customer be bound alone or with another or
     others and whether as principal or surety (such debts
     and liabilities being hereinafter called the “liabili-
     ties”); the liability of the undersigned hereunder
     being limited to the sum of Twenty-One Million Canadian
     (C$21,000,000.00) Dollars [approximately $16,382,100 on
     June 30, 1993] together with interest * * *

     AND THE UNDERSIGNED AND EACH OF THEM (IF MORE THAN ONE)
     HEREBY JOINTLY AND SEVERALLY AGREE(S) WITH THE BANK AS
     FOLLOWS:

        *        *       *       *       *       *       *

     (5) All indebtedness and liability, present and fu-
     ture, of the customer to the undersigned [petitioner]
     or any of them are hereby assigned to the Bank and
     postponed to the liabilities, and all moneys received
     by the undersigned * * * shall be received in trust for
     the Bank and forthwith upon receipt shall be paid over
     to the Bank, the whole without in any way limiting or
     lessening the liability of the undersigned under the
     foregoing guarantee; and this assignment and postpone-
     ment is independent of the said guarantee and shall
     remain in full effect notwithstanding that the liabil-
     ity of the undersigned or any of them under the said
     guarantee may be extinct. The term “Liabilities”, as
     previously defined, for purposes of the postponement
     feature provided by this agreement, and this section in
     particular, includes any funds advanced or held at the
     disposal of the customer under any line(s) of credit.

     At some point between July 1 and October 22, 1992, it was

determined that petitioner’s anticipated Federal income tax (tax)

for its tax year ended June 30, 1993, would be approximately $4.1

million.    Petitioner retained Price Waterhouse to review its tax

planning options and to make recommendations to minimize peti-

tioner’s anticipated tax for that year (Price Waterhouse’s review

and recommendation).

     Steve Wolf (Mr. Wolf) was the Price Waterhouse partner
                               - 5 -

responsible for Price Waterhouse’s review and recommendation.

Bruce Thorpe (Mr. Thorpe) was the senior manager assigned to

Price Waterhouse’s review and recommendation.   Dale Bond (Mr.

Bond) was a senior associate assigned to Price Waterhouse’s

review and recommendation and worked under the supervision of Mr.

Thorpe.   Douglas Saunders (Mr. Saunders), who worked in Price

Waterhouse’s office in Mississauga, Ontario (Mississauga

office),5 assisted Mr. Bond in Price Waterhouse’s review and

recommendation.   Mr. Saunders continued to provide assistance in

Price Waterhouse’s review and recommendation after he joined

petitioner in March 1993 as vice president and controller.6

     As part of Price Waterhouse’s review and recommendation,

Price Waterhouse conducted a study of ITC’s earnings and profits

(ITC’s E&P study).   ITC’s E&P study was necessary in order to


     5
      In 1970, Mr. Saunders began working for Price Waterhouse as
a staff assistant in its Toronto office. He became a staff
accountant in 1971, a senior staff accountant in 1973, a supervi-
sor in 1975, a manager in 1977, and a partner in 1980. After
becoming a manager in 1977, Mr. Saunders transferred to Price
Waterhouse’s Mississauga office. During his tenure at Price
Waterhouse, Mr. Saunders was involved in dividend planning for
multinational clients. In that role, Mr. Saunders reviewed
proposed transactions of such clients in order to identify any
potential Canadian tax issues, such as the Canadian nonresident
withholding tax on dividends. Mr. Saunders did not provide any
advice about the United States tax consequences of any such
proposed transactions.
     6
      Mr. Saunders remained as vice president and controller of
petitioner until his retirement. The record does not disclose
the precise date on which Mr. Saunders retired from petitioner.
As of the time of the trial in this case, Mr. Saunders was
working for petitioner under a three-year consulting arrangement.
                               - 6 -

determine whether ITC had sufficient earnings and profits to pay

a dividend to petitioner that would generate sufficient foreign

tax credits to minimize petitioner’s anticipated tax liability

for its taxable year ended June 30, 1993.    ITC’s E&P study was

very complex and time-consuming.7

     On January 13, 1993, Mr. Bond prepared on behalf of Mr.

Thorpe a Price Waterhouse interoffice memorandum addressed to

Cullen Duke of Price Waterhouse’s Houston office (January 13,

1993 interoffice memorandum) regarding the viability of ITC’s

paying a dividend to petitioner.    Mr. Thorpe reviewed and ap-

proved that memorandum.   The January 13, 1993 interoffice memo-

randum stated in pertinent part:

     Our planning idea involves paying another dividend from
     InterTAN Canada [ITC] to generate deemed paid credits
     that the U.S. parent [petitioner] can use to offset the
     tax on the Subpart F income. Since InterTAN Canada
     will have a deficit in its post-1986 E&P pool, the
     dividend will have to be paid out of pre-1987 E&P.
     When a foreign corporation pays a dividend when there
     is a deficit in its post-1986 E&P pool, Notice 87-54
     requires the deficit be carried back to offset E&P in
     pre-1987 years. If InterTAN Canada’s deficit in its
     post-1986 E&P pool is within a certain range, InterTAN
     Canada will be able to pay a small dividend out of 1985
     E&P and bring up approximately $8 million of deemed
     paid foreign taxes. If the deficit in the post-1986
     E&P pool is too small, the effective tax rate on the
     1985 E&P that remains after carryback of the deficit


     7
      The complexity of ITC’s E&P study related, inter alia, to a
deficit in ITC’s post-1986 earnings and profits pool and certain
losses of ITC that had been carried back to its prior taxable
years and had thereby created refunds. Such refunds complicated
the calculation of ITC’s post-1986 foreign income taxes and post-
1986 undistributed earnings.
                               - 7 -

     will be too low for the planning strategy to work. If
     the deficit in the pool is too large, the carryback
     will eliminate all of the 1985 E&P.

     With our current projections for the fiscal year 1993
     loss, the planning idea appears to be viable, but it
     relies on taking a position that we feel is unclear.
     InterTAN Canada has filed for a $17 million (Canadian)
     refund due to the carryback of the fiscal year 1992
     loss. We have accrued the refund as a receivable and
     increased the 1992 E&P for the amount of the refund.
     Regulations §1.905-3T discusses adjustments to the E&P
     pool for refunds received. However, Revenue Ruling 64-
     146 states that for purposes of paying dividends, a
     refund due to the carryback of a net operating loss
     increases the E&P of the loss year. Relying upon
     Revenue Ruling 64-146 and accruing the refund related
     to the 1992 loss will put the deficit in the post-1986
     E&P pool at a level that will make the planning strat-
     egy possible.

     On April 22, 1993, Mr. Saunders, who was at that time

petitioner’s vice president and corporate controller, had a

meeting (April 22, 1993 meeting) with Mr. Wolf, Mr. Thorpe, and

Mr. Bond.   Mr. Thorpe prepared a written summary of that meeting

dated April 22, 1993 (April 22, 1993 meeting summary).   The April

22, 1993 meeting summary stated in pertinent part under the

heading “PLANNING IDEAS”:

     Avoid withholding tax in Canada by making dividend a
     repayment of paid-in capital. We must first create
     some paid-in capital. This can possibly be done by
     having ITI [petitioner] contribute a $30 million note
     * * * from Canada [ITC] to Canada. Canada will then
     pay the dividend and ITI will make another loan to
     Canada. The IRS shouldn’t really care because the U.S.
     tax result is the same as if the planning had not been
     done. Doug will look into the Canadian tax issues. We
     need to clear all this with MTC [Price Waterhouse’s
     Multi-State Consulting group].

     On June 15, 1993, Mr. Bond prepared on behalf of Mr. Thorpe
                                 - 8 -

a memorandum addressed to Keith Wettlaufer (Mr. Wettlaufer),

senior vice president of petitioner and of ITC for finance and

administration (June 15, 1993 memorandum).   Mr. Thorpe reviewed

and initialed that memorandum.    The June 15, 1993 memorandum set

forth Price Waterhouse’s suggestions as to the steps necessary to

effect a dividend from ITC to petitioner that would avoid Cana-

dian withholding tax and generate sufficient foreign tax credits

to minimize petitioner’s anticipated tax liability for its

taxable year ended June 30, 1993.    The June 15, 1993 memorandum

stated:

     As you requested, this memorandum outlines the steps we
     feel are necessary to pay a dividend from InterTAN
     Canada Ltd (Canada) [ITC] to InterTAN, Inc. (ITI)
     [petitioner] and avoid the Canadian withholding tax.

          1.   Prior to paying the dividend, Canada should
               repay all or a portion of the note payable to
               ITI.

          2.   ITI should then make a cash contribution to
               Canada. The purpose of this step is to in-
               crease Canada’s paid in capital so the divi-
               dend can be considered a return of capital
               for Canadian tax purposes. This step should
               also be completed prior to paying the divi-
               dend.

          3.   Canada should pay the dividend on or before
               June 30, 1993.

          4.   During the 1st quarter of the next fiscal
               year ITI can make a new loan to Canada.

     We feel that the steps outlined above are necessary to
     help prevent the Internal Revenue Service from reclas-
     sifying the transaction as something other than a
     dividend and disallowing ITI’s deemed paid foreign tax
     credits associated with the dividend. We also feel
                               - 9 -

     that varying the dollar amounts involved in the various
     steps by a significant amount (say $1 million) will
     help reduce exposure. The actual amounts to be paid
     will be determined after final projections are com-
     pleted. It is our understanding from previous conver-
     sations with Doug Saunders that this transaction will
     avoid the Canadian withholding tax.

     On June 15, 1993, the June 15, 1993 memorandum was sent by

facsimile to Mr. Wettlaufer.   On June 24, 1993, a copy of the

June 15, 1993 memorandum was sent by facsimile to Mr. Saunders

who was in Paris, France.

     After reviewing the June 15, 1993 memorandum, Mr. Saunders

suggested certain changes to the steps of the proposed transac-

tion outlined in that memorandum.   Mr. Saunders suggested that,

instead of contributing cash to ITC, petitioner should purchase

preferred stock from ITC and ITC should redeem that preferred

stock.   Mr. Saunders made that suggestion because he was con-

cerned that the contribution of cash described in the June 15,

1993 memorandum would not result in paid-in capital for Canadian

withholding tax purposes.   In that event, the payment of a

dividend by ITC to petitioner would have the undesirable result

of triggering the imposition of such a tax.

     Mr. Bond prepared a memorandum to petitioner’s tax file

dated June 28, 1993 (June 28, 1993 file memorandum).   That

memorandum incorporated the suggestion made by Mr. Saunders to

avoid imposition of the Canadian withholding tax.   The June 28,

1993 file memorandum stated in pertinent part:
                          - 10 -

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.
                                 - 11 -

     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.

          *        *       *       *          *       *       *

     CONCLUSIONS

     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
              step.



     8
      Mr. Saunders did not review Mr. Bond’s draft June 1993 file
memorandum prior to the trial in this case.
                                 - 12 -

          *        *       *       *       *        *       *

     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
                               - 13 -

a balance of $687,499.91.   On July 2, 1993,9 after the actions

described below which took place on June 30 and July 2, 1993,

ITC’s Royal Bank account balance was the same amount as it was on

June 30, 1993, except for reductions attributable to an overdraft

interest charge10 and the clearing of checks unrelated to the

actions described below.    The balance in petitioner’s Royal Bank

account, number 302-0402-4 (petitioner’s Royal Bank account), was

the same before and after the actions described below.

     On June 30, 1993, Royal Bank received a letter (June 30,

1993 letter) from Louis G. Neumann (Mr. Neumann), petitioner’s

vice president, secretary, and general counsel and ITC’s vice

president and secretary.    The June 30, 1993 letter stated in

pertinent part:

     In confirmation of our recent conversation it is hereby
     requested that you affect [sic] the following transac-
     tions on behalf of InterTAN Inc. [petitioner] and its
     subsidiary InterTAN Canada Ltd [ITC]:

     1.   The sum of US$20,000,000.00 is to be advanced to
          InterTAN Canada Ltd. by Royal Bank and deposited
          to account number 302-8529-6.

     2.   The enclosed cheque [dated June 29, 1993] in the
          sum of US$20,000,000.00 drawn on account number
          302-8529-6 [ITC’s Royal Bank account] and made
          payable to InterTAN Inc. is to be deposited in
          InterTAN’s account number 302-0402-4 [petitioner’s


     9
      July 1, 1993, was Canada Day, a federal and bank holiday in
Canada.
     10
      The $3,552.67 overdraft interest charged to ITC on July 2,
1993, was reversed on July 16, 1993, and new overdraft interest
charges in the amounts of $101.48 and $12,211.91 were imposed.
                               - 14 -

           Royal Bank account] in repayment of a loan.

     3.    InterTAN’s enclosed cheque [dated June 30, 1993]
           in the amount of US$20,000,000.00 is to be depos-
           ited into account number 302-8529-6 in combination
           for the issuance of InterTAN Canada Ltd. preferred
           shares.

     4.    The enclosed cheque [dated June 29, 1993] in the
           amount of [US]$20,000,000.00 drawn on account
           number 302-8529-6 is to then be deposited in
           InterTAN’s account number 302-0402-4 in payment
           for the redemption of 200,000 InterTAN Canada Ltd.
           preferred shares.

     On June 30, 1993, pursuant to the June 30, 1993 letter, the

following actions occurred:

     1.   A check dated June 29, 1993, drawn upon ITC’s Royal Bank

account and payable to petitioner in the amount of $20 million,

was presented to Royal Bank.   Pursuant to the June 30, 1993

letter, Royal Bank deposited that check into petitioner’s Royal

Bank account.   Royal Bank honored that check, which resulted in

an overdraft of $19,379,772.65 in ITC’s Royal Bank account (ITC’s

overdraft) as of the close of business on June 30, 1993.   Royal

Bank permitted ITC’s overdraft because:   (1) Pursuant to the

guarantee and assignment agreement, all indebtedness and liabili-

ties of ITC to petitioner were assigned to Royal Bank (assign-

ment) and were postponed to any debt and liabilities of ITC to

Royal Bank, including any funds advanced under any line of credit

by Royal Bank to ITC (postponement), and petitioner was required

to hold in trust for and pay to Royal Bank any money that it

received from ITC; (2) petitioner and ITC made a commitment to
                              - 15 -

Royal Bank that the $20 million withdrawn from ITC’s Royal Bank

account and deposited into petitioner’s Royal Bank account on

June 30, 1993, would be redeposited into ITC’s Royal Bank account

on July 2, 1993, the first Canadian federal and bank business day

after June 30, 1993, in order to satisfy ITC’s overdraft; and

(3) pursuant to the guarantee and assignment agreement, peti-

tioner guaranteed ITC’s overdraft to the extent of $16,382,100.11

As part of the commitment of petitioner and of ITC to redeposit

into ITC’s Royal Bank account on July 2, 1993, the $20 million

check dated June 29, 1993, and drawn on ITC’s Royal Bank account

and deposited into petitioner’s Royal Bank account on June 30,

1993, petitioner agreed to return that $20 million to ITC in

order to enable ITC to satisfy ITC’s overdraft.

     2.   A check dated June 30, 1993, drawn upon petitioner’s

Royal Bank account at Royal Bank and payable to ITC in the amount

of $20 million, was presented to Royal Bank.   Pursuant to the

June 30, 1993 letter, Royal Bank deposited that check into ITC’s

Royal Bank account.

     3.   A check dated June 29, 1993, drawn upon ITC’s Royal Bank

account at Royal Bank and payable to petitioner in the amount of

$20 million, was presented to Royal Bank.   Pursuant to the June


     11
      Pursuant to the guarantee and assignment agreement, the
assignment and postponement were independent of petitioner’s
guarantee under such agreement and were to remain in full force
and effect even though the liability of petitioner as guarantor
under that agreement may have been extinct.
                               - 16 -

30, 1993 letter, Royal Bank deposited that check into peti-

tioner’s Royal Bank account.

     On July 2, 1993, Royal Bank received a letter (July 2, 1993

letter) from Mr. Neumann.   The July 2, 1993 letter stated in

pertinent part:

     Would you please accomplish the following on behalf of
     InterTAN Inc. [petitioner] and its wholly owned subsid-
     iary InterTAN Canada Ltd. [ITC]:

     1.    The enclosed cheque in the amount of
           US$20,000,000.00 drawn on InterTAN Inc. account
           number 302-0402-4 [petitioner’s Royal Bank ac-
           count] is to be deposited in InterTAN Canada Ltd.
           account number 302-8529-6 as a loan from InterTAN
           Inc. to InterTAN Canada Ltd.

     2.    Withdraw the sum of US$20,000,000.00 from the
           account of InterTAN Canada Ltd. account number
           302-8529-6 to satisfy an overdraft owing to Royal
           Bank by InterTAN Canada Ltd.

     On July 2, 1993, pursuant to the July 2, 1993 letter, the

following actions occurred:

     4.   The check enclosed with the July 2, 1993 letter that was

drawn upon petitioner’s Royal Bank account at Royal Bank and

payable to ITC in the amount of $20 million was presented to

Royal Bank.   Pursuant to the July 2, 1993 letter, Royal Bank

deposited that check into ITC’s Royal Bank account.

     5.   Royal Bank debited ITC’s Royal Bank account in the

amount of $20 million, which ITC had received from petitioner on

July 2, 1993, as described above as action 4, in order to satisfy

ITC’s overdraft.
                              - 17 -

(We shall refer collectively to the above-described actions 1

through 5 as the disputed transaction and individually as steps

1, 2, 3, 4, or 5 as the case may be.)

     On March 15, 1994, petitioner filed Form 1120, U.S. Corpora-

tion Income Tax Return, for its taxable year ended June 30, 1993

(petitioner’s 1993 return), with the Internal Revenue Service

Center in Austin, Texas.   In that return, petitioner reported

dividends received of $52,486,578, of which $20 million was the

dividend that petitioner reported it received from ITC, and

foreign dividend gross-up under section 78 of $18,295,867.12

Petitioner claimed total tax (1) before foreign tax credits of

$18,696,569 and (2) after foreign tax credits of $1,146,387.13

Schedule C, Dividends and Special Deductions (petitioner’s 1993

Schedule C), of petitioner’s 1993 return reported a dividend of

$20 million and a foreign dividend gross-up under section 78 of

$18,236,696.   In Schedule J, Tax Computation, of petitioner’s

1993 return, petitioner claimed foreign tax credits of

$18,540,543, of which $18,236,696 was attributable to the $20

million dividend that petitioner reported it received from ITC in


     12
      The foreign dividend gross-up under sec. 78 of $18,295,867
claimed in petitioner’s 1993 return included foreign dividend
gross-up under sec. 78 of $18,236,696 attributable to the claimed
dividend from ITC and $59,170 attributable to petitioner’s
Belgium subsidiary.
     13
      The total tax before and after foreign tax credits also
reflected an alternative minimum tax of $927,944 and an environ-
mental tax of $62,417.
                                  - 18 -

petitioner’s 1993 Schedule C.

     In the fall of 1996, respondent began an examination of

petitioner’s taxable years ended June 30, 1990, 1991, 1992, and

1993.     On October 8, 1996, petitioner mailed to respondent a

letter on petitioner’s letterhead, entitled “STATEMENT FURNISHED

UNDER REVENUE PROCEDURE 94-69", which respondent received on

October 11, 1996 (October 11, 1996 disclosure letter).         Price

Waterhouse had drafted that letter.        The October 11, 1996 disclo-

sure letter stated in pertinent part:

     As previously disclosed to the Internal Revenue Service
     (IRS) in July 1995, and on September 24, 1996,
     InterTAN, Inc. [petitioner] is facing under Internal
     Revenue Code Section 905(c) a potential redetermination
     of the foreign tax credits claimed on its U.S. income
     tax returns for the years ended June 30, 1990 through
     June 30, 1993. The redetermination could arise from a
     potential deficit in the post-1986 pool of foreign
     taxes for InterTAN Canada Ltd. (InterTAN Canada) [ITC].
     In this eventuality, InterTAN, Inc.’s foreign tax
     credits would be required to be redetermined pursuant
     to Treasury Regulation Section 1.905-3T(d)(4)(iv) with
     notification made by InterTAN Inc. pursuant to Treasury
     Regulation Section 1.905-4T(b).

        The dividends paid by InterTAN Canada from the 1988
        through 1992 tax years are as follows:

                                            Deemed-paid
         Tax     Type of                     Foreign Tax   Grossed-up
        Year    Dividend      Amount            Credit      Dividend
        1988    Preferred   $23,910,500      $15,720,834   $39,631,334
                  Stock
               Redemption
        1989    Preferred   13,570,739        8,745,782    22,316,521
                  Stock
               Redemption
        1992    Preferred    20,000,000      18,236,696    38,236,696
                  Stock
               Redemption
                             - 19 -

    InterTAN Canada incurred losses in the 1990 through
    1992 tax years and carried them back to obtain refunds
    of Canadian income taxes. The refunds obtained are as
    follows:

    Tax Year for     Amount of
     Which Taxes     Refund in   Exchange   Amount of Refund in
  Originally Paid   Canadian $     Rate            U.S. $
      6/30/88       $ 901,411      .8141        $ 733,868
      6/30/89       16,621,759     .8320        13,829,147
      6/30/90        9,782,191     .8610         8,422,855

     The reductions to InterTAN Canada’s post-1986 pool of
     foreign taxes resulting from the distributions and the
     refunds could create a deficit in the pool. Presently,
     however, it is unclear whether InterTAN Canada’s post-
     1986 pool of taxes is, in fact, in a deficit position.
     The uncertainty arises from two factors.

     First, in the examination of InterTAN Inc’s 1986
     through 1988 tax returns, the IRS has proposed to
     recharacterize the June 30, 1989 preferred stock re-
     demption. The taxpayer reflected the transaction as a
     dividend distribution; but the IRS has argued the
     instrument was debt and the distribution, a repayment.
     Should the IRS position be sustained, there would have
     been no deemed distribution of foreign taxes to reduce
     the post-1986 pool. The examination is currently in
     the jurisdiction of the appellate division of the IRS.
     In addition, Revenue Canada is currently examining
     InterTAN Canada’s income tax returns and has proposed
     adjustments that could significantly increase the
     balance of InterTAN Canada’s pool of foreign taxes.
     The characterization of the 1989 distribution as a
     repayment of debt or significant assessments by Revenue
     Canada could each independently affect InterTAN Can-
     ada’s pool of foreign tax such that the pool would not
     have a deficit balance. [Emphasis added; footnotes
     omitted.]

     On December 17, 2001, respondent accepted Form 870-AD, Offer

to Waive Restrictions on Assessment and Collection of Tax Defi-

ciency and to Accept Overassessment (Form 870-AD), which peti-
                              - 20 -

tioner had signed and submitted to respondent with respect to

petitioner’s taxable years ended June 30, 1989, 1990, 1991, 1992,

1993, and 1994.   With respect to petitioner’s taxable year ended

June 30, 1993, Form 870-AD reflected petitioner’s agreement to an

overassessment of $712,316.   That agreement was explained in Form

3610, Audit Statement, and Form 5278, Statement--Income Tax

Change, which were prepared on November 27, 2001 (collectively,

respondent’s November 27, 2001 audit report).   In respondent’s

November 27, 2001 audit report, respondent determined that:

(1) Petitioner’s income attributable to the claimed dividend from

ITC should be decreased by $38,236,696, representing a decrease

of dividends received of $20,000,000 and a decrease in foreign

dividend gross-up under section 78 of $18,236,696; (2) the

foreign tax credits that petitioner claimed as a result of the

claimed dividend income from ITC were disallowed; and (3) peti-

tioner had a loss of $8,906,122 attributable to a net operating

loss carried back from petitioner’s taxable year ended June 30,

1995.

     On February 7, 2002, respondent issued a notice of defi-

ciency (notice) to petitioner.   In that notice, respondent

determined that petitioner is liable for the year at issue for

the accuracy-related penalty under section 6662(a).   That is

because respondent determined that there was an understatement of

$5,004,095 in petitioner’s 1993 return that was attributable to
                              - 21 -

the foreign tax credits which petitioner claimed with respect to

the $20 million dividend that it reported it received from ITC

and that that understatement is substantial within the meaning of

section 6662(d)(1)(A) and (B).

                              OPINION

     Petitioner bears the burden of proving that the determina-

tion in the notice is erroneous.14   See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

     Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the tax resulting from a substantial understatement

of income tax.   An understatement is equal to the excess of the

amount of tax required to be shown in the tax return over the

amount of tax shown in such return, see sec. 6662(d)(2)(A), and

is substantial in the case of a corporation if the amount of the

understatement for the taxable year exceeds the greater of 10

percent of the tax required to be shown in the tax return for

that year or $10,000, see sec. 6662(d)(1)(A) and (B).

     The amount of the understatement may be reduced to the

extent that it is attributable to, inter alia, the tax treatment

of an item for which there is or was substantial authority.      See

sec. 6662(d)(2)(B)(i).   The substantial authority standard is an

objective standard involving an analysis of the law and the


     14
      Respondent’s examination of the year at issue began before
July 23, 1998. We conclude that sec. 7491(c) is not applicable
in the instant case.
                                - 22 -

application of the law to relevant facts.       Sec. 1.6662-4(d)(2),

Income Tax Regs.   That standard is not so stringent that a

taxpayer's treatment must be one that has a greater than

50-percent likelihood of being sustained in litigation.        See id.

However, the substantial authority standard is more stringent

than the reasonable basis standard as defined in section 1.6662-

3(b)(3), Income Tax Regs.   Sec. 1.6662-4(d)(2), Income Tax Regs.

There may be substantial authority for more than one position

with respect to the same item.    Sec. 1.6662-4(d)(3)(i), Income

Tax Regs.

     In order to satisfy the substantial authority standard of

section 6662(d)(2)(B)(i), a taxpayer must show that the weight of

the authorities supporting the tax return treatment of an item is

substantial in relation to the weight of authorities supporting

contrary treatment.   Antonides v. Commissioner, 91 T.C. 686, 702

(1988), affd. 893 F.2d 656 (4th Cir. 1990); sec.

1.6662-4(d)(3)(i), Income Tax Regs.      All authorities relevant to

the tax treatment of an item, including the authorities contrary

to the treatment, are taken into account in determining whether

substantial authority exists.    Sec. 1.6662-4(d)(3)(i), Income Tax

Regs.   The weight of authorities is determined in light of the

pertinent facts and circumstances.       Id.   The weight accorded an

authority depends on its relevance and persuasiveness and the

type of document providing the authority.       Sec. 1.6662-
                                  - 23 -

4(d)(3)(ii), Income Tax Regs.      An authority which is materially

distinguishable on its facts or otherwise inapplicable to the tax

treatment at issue is not particularly relevant and is not

substantial authority.      Id.   There may be substantial authority

for the tax treatment of an item despite the absence of certain

types of authority.   Id.     Thus, a taxpayer may have substantial

authority for a position even where it is supported only by a

well-reasoned construction of the pertinent statutory provision

as applied to the relevant facts.       Id.

     The amount of the understatement may also be reduced to the

extent that it is attributable to, inter alia, an item for which

the relevant facts affecting the item’s tax treatment were

adequately disclosed in the return or in a statement attached to

the return.   Sec. 6662(d)(2)(B)(ii).      In order to satisfy the

adequate disclosure standard of section 6662(d)(2)(B)(ii), a

taxpayer must disclose the relevant facts on a properly completed

form (i.e., Form 8275, Disclosure Statement (Form 8275)) attached

to the return or to a qualified amended return.       Sec.

1.6662-4(f)(1), Income Tax Regs.      In Revenue Procedure 94-69,

1994-2 C.B. 804 (Revenue Procedure 94-69), the Internal Revenue

Service (IRS) promulgated procedures under which certain taxpay-

ers15 may meet the requirements for adequate disclosure under



     15
      The parties do not dispute that petitioner is the type of
taxpayer to which the rules of Revenue Procedure 94-69 apply.
                              - 24 -

section 6662(d)(2)(B)(ii).   Under Revenue Procedure 94-69, a

qualifying taxpayer may submit a statement to the IRS which will

qualify as adequate disclosure under section 6662(d)(2)(B)(ii)

and the regulations thereunder if, inter alia, the statement

discloses “information that reasonably may be expected to apprise

the Internal Revenue Service of the identity of the item, its

amount, and the nature of the controversy or potential contro-

versy.”   Rev. Proc. 94-69, sec. 3.02(2), 1994-2 C.B. at 806.

     If the disputed transaction is a tax shelter within the

meaning of section 6662(d)(2)(C)(ii), a taxpayer may not avoid

liability for the accuracy-related penalty by adequately disclos-

ing the transaction in question.   Sec. 6662(d)(2)(C)(i)(I).

Moreover, in the case of a tax shelter, in order to avoid liabil-

ity for the accuracy-related penalty, a taxpayer not only must

demonstrate that there is or was substantial authority for the

tax return treatment of the transaction in question, but also

must prove that it reasonably believed that that treatment is

more likely than not the proper treatment.   Sec.

6662(d)(2)(C)(i)(II).

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion.   Sec. 6664(c)(1).   The

determination of whether the taxpayer acted with reasonable cause
                              - 25 -

and in good faith depends on the pertinent facts and circum-

stances, including the taxpayer's efforts to assess such tax-

payer’s proper tax liability, the knowledge and experience of the

taxpayer, and the reliance on the advice of a professional, such

as an accountant.   Sec. 1.6664-4(b)(1), Income Tax Regs.   Reli-

ance on the advice of a professional, such as an accountant, does

not necessarily demonstrate reasonable cause and good faith

unless, under all the circumstances, such reliance was reasonable

and the taxpayer acted in good faith.   Id.   In this connection, a

taxpayer must demonstrate that its reliance on the advice of a

professional concerning substantive tax law was objectively

reasonable.   Chamberlain v. Commissioner, 66 F.3d 729, 732-733

(5th Cir. 1995), affg. in part and revg. in part T.C. Memo. 1994-

228; Goldman v. Commissioner, 39 F.3d 402, 408 (2d Cir. 1994),

affg. T.C. Memo. 1993-480.   In the case of claimed reliance on

the accountant who prepared the taxpayer's tax return, the

taxpayer must establish that correct information was provided to

the accountant and that the item incorrectly omitted, claimed, or

reported in the return was the result of the accountant's error.

Westbrook v. Commissioner, 68 F.3d 868, 881 (5th Cir. 1995),

affg. T.C. Memo. 1993-634; Weis v. Commissioner, 94 T.C. 473, 487

(1990); Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 173 (1978).

     In the instant case, respondent determined that there was an

understatement of $5,004,095 in petitioner’s 1993 return that was
                              - 26 -

attributable to the foreign tax credits which petitioner claimed

with respect to the $20 million dividend that it reported it

received from ITC and that that understatement is substantial

within the meaning of section 6662(d)(1)(A) and (B).    In support

of that determination, respondent advances two alternative

positions.   First, respondent argues:   The disputed transaction

is a tax shelter within the meaning of section 6662(d)(2)(C)(ii);

petitioner’s treatment of the disputed transaction in peti-

tioner’s 1993 return is not supported by substantial authority;

petitioner did not reasonably believe that its treatment of the

disputed transaction was more likely than not the proper treat-

ment; and petitioner did not have reasonable cause for, or act in

good faith with respect to, its treatment of the disputed trans-

action in petitioner’s 1993 return.    Alternatively, respondent

argues that, even if the disputed transaction were not a tax

shelter within the meaning of 6662(d)(2)(C)(ii), petitioner’s

treatment of the disputed transaction is not supported by sub-

stantial authority; the relevant facts affecting the tax treat-

ment of the disputed transaction were not adequately disclosed in

petitioner’s 1993 return or in the October 11, 1996 disclosure

letter; and petitioner did not have reasonable cause for, or act

in good faith with respect to, its treatment of the disputed

transaction in petitioner’s 1993 return (respondent’s alternative

position).
                              - 27 -

     With respect to respondent’s position that the disputed

transaction is a tax shelter within the meaning of section

6662(d)(2)(C)(ii), petitioner argues that the disputed transac-

tion did not have any of the common indicia of a tax shelter

(e.g., marketing by a promoter, dissemination of a confidential

prospectus, and a special fee or premium paid to a promoter).

According to petitioner, the disputed transaction was nothing

more than normal dividend planning that was typical of multina-

tional companies like petitioner.

     We need not resolve the parties’ dispute over whether the

disputed transaction is a tax shelter within the meaning of

section 6662(d)(2)(C)(ii).   That is because, assuming arguendo

that we were to accept petitioner’s argument and find that the

disputed transaction is not a tax shelter under that section, on

the record before us, we accept respondent’s alternative position

that petitioner is nonetheless liable for the accuracy-related

penalty under section 6662(a).

     With respect to respondent’s argument under respondent’s

alternative position that there is and was no substantial author-

ity for petitioner’s tax treatment of the disputed transaction,

petitioner counters that its reporting of the disputed transac-

tion in petitioner’s 1993 return “was mandated by the provisions

of Code §§ 301 and 302.”   On the record before us, we reject

petitioner’s position.
                                - 28 -

     In structuring and implementing the disputed transaction,

petitioner was not motivated by any nontax business purpose;

petitioner’s sole intention was to generate a tax benefit in the

form of foreign tax credits.    The disputed transaction resulted

in no change in the economic position of either petitioner or

ITC.16    Petitioner did not have any benefits or burdens associ-

ated with the preferred stock that ITC purportedly issued to it.

The purported issuance to petitioner of ITC’s preferred stock was

but one fleeting, transitory step in the disputed transaction

that was undertaken so that ITC could purportedly immediately

redeem that stock, thereby enabling petitioner to claim that such

redemption resulted in a dividend to it under sections 302 and



     16
      With respect to whether the disputed transaction resulted
in any change in the economic position of petitioner or ITC, Mr.
Saunders testified as follows:

          Q    InterTAN Canada’s [ITC’s] financial position
     before this transaction began was exactly the same as
     it was after this transaction began. Correct?

            A    That’s correct.

          Q    InterTAN U.S.’s [petitioner’s] financial
     position before this transaction began was exactly the
     same as its financial condition after this transaction
     began.

            A    Except for the deemed foreign tax credits.
     Yes.

          Q    Other than--of course, other than for tax
     benefits, it was the same. Right?

            A    Yes.
                                - 29 -

301.17    On the record before us, we find that the disputed trans-

action, including the purported issuance to petitioner of ITC’s

preferred stock and the purported redemption by ITC of that

stock, should be disregarded for tax purposes.    On that record,

we further find there was no ITC preferred stock owned by peti-

tioner that could have been redeemed by ITC.    On the record

before us, we conclude that sections 302 and 301 have no applica-

tion to, and do not constitute substantial authority under

section 6662(d)(2)(B)(i) and the regulations thereunder for

petitioner’s tax treatment of, the disputed transaction.

     In addition to relying on sections 302 and 301 as substan-

tial authority for its tax treatment of the disputed transaction,

petitioner relies on Estate of Crellin v. Commissioner, 203 F.2d

812 (9th Cir. 1953), affg. 17 T.C. 781 (1951), and Soreng v.

Commissioner, 158 F.2d 340 (7th Cir. 1946), affg. 4 T.C. 870

(1945).    Both of those cases involved the declaration of a

dividend, and not the purported issuance and the purported

immediate redemption of stock under section 302.    Estate of

Crellin and Soreng are materially distinguishable from the

instant case and do not constitute substantial authority for


     17
      Instead of having petitioner purportedly contribute money
to ITC and having ITC declare a dividend payable to petitioner as
two steps of the transaction in question, the steps of the
disputed transaction consisting of the purported issuance of
ITC’s preferred stock and the purported immediate redemption of
that stock were used in order to help avoid the Canadian nonresi-
dent withholding tax on dividends.
                             - 30 -

petitioner’s tax treatment of the disputed transaction.   Sec.

1.6662-4(d)(3)(ii), Income Tax Regs.

     On the record before us, we find that petitioner has failed

to carry its burden of showing that there is or was substantial

authority within the meaning of section 6662(d)(2)(B)(i) and the

regulations thereunder for the position that it took in peti-

tioner’s 1993 return with respect to the disputed transaction.18

We conclude that the amount of the understatement attributable to

the disputed transaction is not reduced under section

6662(d)(2)(B)(i).

     With respect to respondent’s argument under respondent’s

alternative position that there was no adequate disclosure of the

relevant facts affecting the tax treatment of the disputed

transaction in petitioner’s 1993 return or in the October 11,

1996 disclosure letter, respondent contends that:   (1) Petitioner


     18
      Petitioner also argues that, even if the purported issu-
ance and the purported immediate redemption of ITC’s preferred
stock lacked economic substance or are otherwise disregarded for
tax purposes, there nonetheless is substantial authority for
treating the remaining steps of the disputed transaction as a
dividend from ITC to petitioner. On the record before us, we
reject that argument. The disputed transaction did not involve
the declaration of a dividend by ITC to petitioner. If we were
to disregard the purported issuance and the purported immediate
redemption of ITC’s preferred stock, the steps of the disputed
transaction that would remain are: (1) A purported loan by Royal
Bank to ITC, (2) a purported repayment by ITC to petitioner of an
outstanding loan from petitioner to ITC, and (3) a purported loan
by petitioner to ITC in order to pay off the purported loan by
Royal Bank to ITC. Petitioner cites no authority or facts that
would support the recharacterization of those remaining steps as
a dividend.
                               - 31 -

did not attach Form 8275 to petitioner’s 1993 return as required

by section 1.6662-4(f)(1) and (2), Income Tax Regs., and (2) the

October 11, 1996 disclosure letter failed to provide information

that reasonably could have been expected to apprise the IRS of

the nature of the controversy or potential controversy that the

disputed transaction raised.   Petitioner does not dispute respon-

dent’s position concerning petitioner’s failure to attach Form

8275 to petitioner’s 1993 return, but disputes respondent’s

position concerning the October 11, 1996 disclosure letter.

     According to respondent, the October 11, 1996 disclosure

letter failed to disclose that

     the purported dividend was “paid” solely to generate
     deemed foreign tax credits, the funds to “pay” the
     “dividend” were furnished by RBC [Royal Bank], the
     “dividend” was prearranged to be and was returned by
     petitioner to ITC the next business day, etc. * * *

     Petitioner counters that the October 11, 1996 disclosure

letter qualifies as a qualified amended return under Revenue

Procedure 94-69 because it contained information that reasonably

could have been expected to apprise the IRS of the nature of the

controversy or potential controversy that the disputed transac-

tion raised.   According to petitioner, the October 11, 1996

disclosure letter

     disclosed the preferred stock redemption, its treatment
     of the proceeds of the redemption, the amount of the
     proceeds, and the fact that Respondent was currently
     challenging Petitioner’s characterization of a prior
     ITC preferred stock redemption.
                                   - 32 -

Petitioner maintains that the information set forth in the

October 11, 1996 disclosure letter was sufficient under Revenue

Procedure 94-69 to constitute adequate disclosure of the disputed

transaction under section 6662(d)(2)(B)(ii) and the regulations

thereunder.

        On the record before us, we agree with respondent that the

October 11, 1996 disclosure letter did not reasonably apprise the

IRS of the nature of the controversy or potential controversy

that the disputed transaction raised, as required by Revenue

Procedure 94-69.        The only potential controversy revealed in that

letter was a redetermination of the foreign tax credits claimed

by petitioner because of a potential deficit in ITC’s post-1986

pool of foreign taxes (ITC’s pool of foreign taxes).19       The

October 11, 1996 disclosure letter, by failing to disclose all

the steps of the disputed transaction, did not provide informa-

tion that reasonably could have been expected to apprise the IRS

that:        (1) Petitioner and ITC engaged in the disputed transaction

solely to generate foreign tax credits; (2) the terms of the

guarantee and assignment agreement required that any money

received by petitioner from ITC be held in trust for and paid



        19
      The reason for a possible redetermination of ITC’s pool of
foreign taxes disclosed in the October 11, 1996 disclosure letter
was the possibility that, for reasons undisclosed by the record,
a prior claimed dividend from ITC to petitioner would be charac-
terized as a repayment of a loan and a reassessment by Canada of
ITC’s Canadian taxes.
                              - 33 -

over to Royal Bank; (3) on June 30, 1993, ITC purportedly bor-

rowed $20 million from Royal Bank; (4) on June 30, 1993, ITC

purportedly used that $20 million to make a payment to petitioner

on an outstanding loan from petitioner to ITC; (5) on June 30,

1993, petitioner purportedly used the $20 million that it re-

ceived from ITC in order to make a purported purchase of ITC’s

preferred stock; (6) on July 2, 1993, the next bank business day

after June 30, 1993, petitioner purportedly lent ITC the $20

million that it received from ITC on June 30, 1993, in the

purported redemption of ITC’s preferred stock;20 and (7) on July

2, 1993, the next bank business day after June 30, 1993, ITC

repaid the $20 million that it purportedly borrowed from Royal

Bank on June 30, 1993.

     On the record before us, we find that petitioner has failed

to carry its burden of proving that it adequately disclosed

within the meaning of section 6662(d)(2)(B)(ii), the regulations

thereunder, and Revenue Procedure 94-69 the relevant facts

affecting the tax treatment of the disputed transaction in

petitioner’s 1993 return or in the October 11, 1996 disclosure

letter.   Assuming arguendo that we had found that the disputed

transaction was not a tax shelter within the meaning of section



     20
      As noted above, the purported redemption of ITC’s pre-
ferred stock was disclosed in the October 11, 1996 disclosure
letter. However, none of the remaining steps of the disputed
transaction was disclosed in that letter.
                             - 34 -

6662(d)(2)(C)(ii), we conclude that the amount of the understate-

ment attributable to the disputed transaction would not be

reduced under section 6662(d)(2)(B)(ii).

     With respect to respondent’s argument under respondent’s

alternative position that petitioner did not have reasonable

cause for, or act in good faith with respect to, its treatment of

the disputed transaction in petitioner’s 1993 return, petitioner

counters that petitioner relied generally on Price Waterhouse for

tax compliance and tax planning, that the disputed transaction

was based upon recommendations that Price Waterhouse made, and

that Price Waterhouse prepared petitioner’s 1993 return.   Accord-

ing to petitioner, it was reasonable for it to rely upon Price

Waterhouse’s advice because Mr. Saunders knew that Price Water-

house was a reputable accounting firm with expertise in tax

matters.

     Respondent contends that petitioner failed to provide Price

Waterhouse all of the necessary information regarding the dis-

puted transaction, including the following:

     the funds for the purported dividend were to be pro-
     vided by an overdraft of ITC’s RBC [Royal Bank] account
     guaranteed by petitioner; * * * that preferred stock
     would be purportedly issued and redeemed on the same
     day * * *; and that petitioner had committed to RBC to
     return the purported dividend to ITC’s RBC account the
     next business day. * * * In addition, [Mr.] Bond testi-
     fied that he did not know if PW [Price Waterhouse] was
     aware of petitioner’s guarantee of ITC’s debts to RBC
     * * *.

Respondent further contends that, even if petitioner had provided
                              - 35 -

Price Waterhouse all the necessary information regarding the

disputed transaction, petitioner failed to follow the advice

given by Price Waterhouse to petitioner because petitioner failed

to (1) vary the amount involved in each step of the disputed

transaction and (2) spread those steps “over some length of

time.”

     With respect to respondent’s contention that petitioner did

not provide Price Waterhouse all the necessary information

regarding the disputed transaction, on the instant record, we

agree with respondent.   At trial, Mr. Bond testified that he did

not know whether anyone at Price Waterhouse was aware of the

guarantee and assignment agreement at the time Price Waterhouse

was advising petitioner concerning the disputed transaction.    The

disputed transaction, as initially proposed by Price Waterhouse

and as modified by Mr. Saunders, required, as the initial step of

that transaction, that ITC make a payment to petitioner on an

outstanding loan from petitioner to ITC.   Under the guarantee and

assignment agreement, any payment by ITC to petitioner “shall be

received in trust for the [Royal] Bank and paid over to the

Bank”.   On the record before us, we find that petitioner has

failed to establish that Price Waterhouse was aware of the

foregoing guarantee and assignment agreement at the time Price

Waterhouse was advising petitioner about the disputed transaction

or at the time Price Waterhouse was preparing petitioner’s 1993
                                 - 36 -

return.

     In addition to failing to establish that petitioner made

Price Waterhouse aware of the provisions of the guarantee and

assignment agreement that would apply if the disputed transaction

were effected, on the record before us, we find that petitioner

has failed to establish that it made Price Waterhouse aware at

the time Price Waterhouse was advising petitioner about the

disputed transaction or at the time Price Waterhouse was prepar-

ing petitioner’s 1993 return that steps 4 and 5 (i.e., peti-

tioner’s relending $20 million to ITC and ITC’s using that $20

million to repay the $20 million that it borrowed from Royal Bank

on June 30, 1993) were to, and did, take place on the next

Canadian bank business day (i.e., July 2, 1993)21 after June 30,

1993, the date on which steps 1, 2, and 3 were effected (i.e.,

ITC’s purportedly borrowing $20 million from Royal Bank to make a

payment to petitioner on an outstanding loan from petitioner to

ITC, the purported issuance of ITC’s preferred stock to peti-

tioner in exchange for that $20 million, and ITC’s purported

redemption of that preferred stock for that $20 million).

     Not only did petitioner not provide Price Waterhouse all the

necessary information regarding the disputed transaction, on the

record before us, we find that petitioner failed to follow the

advice that Price Waterhouse gave it based upon the information


     21
          July 1, 1993, was a bank holiday in Canada.
                                - 37 -

that petitioner made available to Price Waterhouse at the time

the disputed transaction was being planned.    The June 15, 1993

memorandum from Mr. Bond to Mr. Wettlaufer, petitioner’s and

ITC’s senior vice president for finance and administration,

advised petitioner that “varying the dollar amounts involved in

the various steps by a significant amount (say $1 million) will

help reduce exposure” to the IRS’s “reclassifying the transaction

as something other than a dividend and disallowing * * * [ITC’s]

deemed paid foreign tax credits associated with the dividend.”22

Petitioner did not follow that advice; the dollar amount in each

step of the disputed transaction was the same, i.e., $20 million.

Mr. Saunders testified that he did not recall why petitioner

failed to vary the amounts involved in the various steps of the

disputed transaction, as Price Waterhouse advised it to do in the

June 15, 1993 memorandum.

     Mr. Bond’s draft June 1993 file memorandum also advised

petitioner that the dollar amount in each step of the disputed

transaction should be varied.    In addition, that memorandum

advised petitioner that the steps of the disputed transaction



     22
      It is significant that the June 15, 1993 memorandum from
Mr. Bond to Mr. Wettlaufer did not even outline the steps of the
disputed transaction as they occurred. Instead, that memorandum
referred to: (1) ITC’s making a payment to petitioner on an
outstanding loan; (2) a cash contribution to ITC by petitioner;
(3) the declaration of a dividend by ITC to petitioner; and
(4) petitioner’s making a new loan to ITC in the first quarter of
the next fiscal year.
                               - 38 -

should be spread out “over some length of time”.23   Mr. Bond’s

draft June 1993 file memorandum gave the foregoing advice to

petitioner for the following reasons set forth in that memoran-

dum:

       The economic situations of both ITI [petitioner] and
       Canada [ITC] are the same after transaction [sic] as
       they were before the transaction. Canada has an obli-
       gation due to ITI both before and after the transac-
       tion. 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 generate
       deemed paid foreign tax credits for ITI. To the extent
       the amounts in each step of the transaction are compa-
       rable and the length of time lapsing between each step
       is short, the IRS will be able to build a better case
       for this position.

       Petitioner did not follow the advice in Mr. Bond’s draft

June 1993 file memorandum.    The dollar amount in each step of the

disputed transaction was the same, i.e., $20 million.    Moreover,

the first three steps of the disputed transaction (i.e., ITC’s

purportedly borrowing $20 million from Royal Bank to make a

payment to petitioner on an outstanding loan from petitioner to

ITC, the purported issuance of ITC’s preferred stock to peti-

tioner in exchange for that $20 million, and ITC’s purported

redemption of that preferred stock for that $20 million) occurred


       23
      It is significant that Mr. Bond’s draft June 1993 file
memorandum did not even outline the steps of the disputed trans-
action as they occurred. Instead, that memorandum referred to:
(1) ITC’s making a payment to petitioner on an outstanding loan;
(2) a cash contribution to ITC by petitioner; (3) the declaration
of a dividend by ITC to petitioner; and (4) petitioner’s making a
new loan to ITC.
                             - 39 -

virtually simultaneously on June 30, 1993, and the last two steps

(i.e., petitioner’s relending $20 million to ITC and ITC’s using

that $20 million to repay the $20 million that it borrowed from

Royal Bank on June 30, 1993) occurred virtually simultaneously on

July 2, 1993, the next Canadian bank business day.

     If, as petitioner claims, it relied on Price Waterhouse’s

advice set forth in the June 15, 1993 memorandum and in Mr.

Bond’s draft June 1993 file memorandum, it seems to us that

petitioner would have followed such advice or would have been

able to explain why it ignored such advice, which it has not.

     The June 28, 1993 file memorandum from Mr. Bond is the only

written memorandum from Price Waterhouse personnel that sets

forth the steps of the disputed transaction as they occurred.

However, that memorandum did not provide any advice by Price

Waterhouse about the tax consequences of those steps.   Instead,

the June 28, 1993 file memorandum merely set forth what peti-

tioner intended to do, as follows:

     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
               Canada.
                                 - 40 -

             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.

     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.

The only advice in the June 28, 1993 file memorandum is attrib-

uted to Mr. Saunders and concerns the Canadian withholding tax

issue.

     With respect to respondent’s argument under respondent’s

alternative position that petitioner did not have reasonable

cause for, or act in good faith with respect to, its treatment of

the disputed transaction in petitioner’s 1993 return, petitioner

further counters that it relied on oral advice (Mr. Wolf’s

alleged oral advice) given by Mr. Wolf, the Price Waterhouse

partner responsible for Price Waterhouse’s review and recommenda-

tion, to Mr. Saunders.     In this connection, Mr. Saunders testi-

fied that Mr. Wolf orally advised him that the disputed transac-

tion would be respected if challenged by respondent.      The only

evidence of Mr. Wolf’s alleged oral advice is Mr. Saunder’s

uncorroborated testimony, which was self-serving to petitioner.24

     24
          At the time of the trial in this case, Mr. Saunders was
                                                       (continued...)
                               - 41 -

Petitioner did not call Mr. Wolf to testify about Mr. Wolf’s

alleged oral advice.   We presume that petitioner did not call Mr.

Wolf as a witness because his testimony would have been unfavor-

able to petitioner’s position in this case.    Wichita Terminal

Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162

F.2d 513 (10th Cir. 1947).   We are unwilling to rely on Mr.

Saunders’ testimony regarding Mr. Wolf’s alleged oral advice.

     On the record before us, we find that petitioner has failed

to establish that it provided all the necessary information

concerning the disputed transaction to Price Waterhouse.   On that

record, we further find that petitioner has failed to establish

that it followed the advice of Price Waterhouse with respect to

the disputed transaction.    On the record before us, we find that

petitioner has failed to carry its burden of proving that there

was reasonable cause for, and that it acted in good faith with

respect to, the underpayment in this case.

     Based upon our examination of the entire record before us,

we find that petitioner has failed to carry its burden of estab-

lishing that petitioner is not liable for the accuracy-related

penalty under section 6662(a).

     We have considered all of the contentions and arguments of

petitioner and respondent that are not discussed herein, and we



     24
      (...continued)
performing services for petitioner under a consulting arrange-
ment.
                             - 42 -

find them to be without merit, irrelevant, and/or moot.

     To reflect the foregoing,


                                      Decision will be entered for

                                 respondent.
