Northern Indiana Public Service Company - Page 1

                                          105 T.C. No. 22                                             

                                     UNITED STATES TAX COURT                                          

                  NORTHERN INDIANA PUBLIC SERVICE COMPANY, Petitioner v.                              
                        COMMISSIONER OF INTERNAL REVENUE, Respondent                                  

                  Docket No. 24468-91.                 Filed November 6, 1995.                        

                        P, a domestic utility company, formed F as a                                  
                  subsidiary corporation in the Netherlands Antilles.                                 
                  F's only activity was to borrow money by issuing                                    
                  Euronotes and then lend the proceeds to P at an                                     
                  interest rate that was 1 percent greater than the rate                              
                  on the Euronotes.  Sec. 1441, I.R.C., generally                                     
                  requires a domestic taxpayer to withhold a 30-percent                               
                  tax on interest paid to nonresident aliens.  However,                               
                  payments to Netherlands Antilles corporations were                                  
                  exempted from this tax pursuant to treaty.  R                                       
                  determined that F was a mere conduit or agent of P,                                 
                  that P should be treated as having paid interest                                    
                  directly to the Euronote holders, and that P is                                     
                  therefore liable for the withholding tax.                                           
                        Held:  F engaged in the business activity of                                  
                  borrowing and lending money.  F was not a mere conduit                              
                  or agent.  The treaty exemption applies.  P is not                                  
                  liable for the withholding tax.                                                     

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