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effectively connected, the section 861(a)(2)(B) source rule does
not apply to the dividend paid by LTD to its shareholders.
Alternatively, petitioners contend that, should we find that LTD
had some effectively connected income during its 3 taxable years
prior to the taxable year ended June 30, 1986, less than 50
percent of LTD’s gross income was effectively connected, and the
dividend therefore would be foreign source and not subject to
withholding tax. As a final alternative, petitioners contend
that, should we find that LTD's effectively connected income
exceeded the 50-percent threshold of section 861(a)(2)(B), only
the portion of LTD's dividend that is proportionate to LTD's
percentage of effectively connected income in such years should
be treated as U.S. source income.
Respondent argues that LTD is a withholding agent liable for
withholding tax on the entire amount of the dividend. Respondent
contends that all of LTD's income was effectively connected with
its U.S. trade or business. Accordingly, respondent argues that
the entire dividend paid by LTD is U.S. source income pursuant to
section 861(a)(2)(B) and is therefore subject to withholding tax
pursuant to section 1441(a).
In the instant case, the dividend in issue was declared on
December 10, 1985. In applying section 861(a)(2)(B), we must
look to LTD’s worldwide gross income for the 3 taxable years that
ended prior to the declaration of the dividend in issue; i.e.,
LTD’s taxable years ended June 30, 1983 through 1985.
Petitioners did not present evidence regarding LTD’s taxable
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