Trafficking in foreign tax credits: A case study of Compaq Computer Corporation |
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| Institution: | 1. Center for Advanced Materials, Qatar University, P.O. Box 2713, Doha, Qatar;2. Department of Environmental Engineering, Hacettepe University, Ankara 06800, Turkey;3. School of Chemical and Process Engineering, University of Leeds, LS2 9JT, UK;1. Escuela de Apan, Universidad Autónoma del Estado de Hidalgo, Hidalgo, Mexico;2. Centro de Física Aplicada y Tecnología Avanzada, Universidad Nacional Autónoma de México, Boulevard Juriquilla 3001, Santiago de Querétaro, Querétaro 76230 Mexico;1. Department of Agricultural Machinery and Technologies Engineering, Faculty of Agriculture, Canakkale Onsekiz Mart University, Canakkale, Turkey;2. Department of Electronics and Automation, Can Vocational School, Canakkale Onsekiz Mart University, Canakkale, Turkey;1. Laboratory of Extremophile Plants, Centre of Biotechnology of Borj Cedria, B.P. 901, Hammam-Lif 2050, Tunisia;2. Faculté des Sciences de Tunis, Université Tunis El Manar, 2092, Tunisia;3. Dipartimento di Scienze e Innovazione Tecnologica, Università del Piemonte Orientale, viale Teresa Michel 11, 15121 Alessandria, Italy |
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| Abstract: | This paper describes a complex tax sham perpetrated by Compaq Computer Corporation and presumably many other U.S. firms during the 1990s. Using a novel trading strategy designed to exploit the tax code and accounting regulations, Compaq purchased what would otherwise be unusable foreign tax credits held by tax-exempt institutions, likely pension funds that held American Depository Receipts (ADRs) for international diversification. These tax-exempt institutions were paid for selling their foreign tax credits occasioned by foreign withholding taxes on dividend income. Obscure trading regulations promulgated by the Securities and Exchange Commission and the New York Stock Exchange (NYSE) facilitated the trading strategy. In 1999, a U.S. Federal District Tax Court ruled that Compaq's strategy lacked economic substance and was a sham. Compaq has appealed the ruling. A similar lower court ruling against IES Industries was overruled in 2001 by the U.S. Appeals Court for the Eighth Circuit in St. Louis. In September 2001, The Wall Street Journal reported that the U.S. Supreme Court may hear the matter depending on the disposition of the Compaq appeal. Recent changes to the Internal Revenue Code presumably preclude this type of trading strategy from being implemented in the future. |
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