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shareholders of MANV. Although the dividends in form passed
through Manver, the ultimate payees were the MANV shareholders.
Accordingly, the payments are subject to withholding tax, and
respondent's determination is sustained.
C. MDT and MSI Payments to Manver in March 1988
Petitioners argue that the March 1988 transactions in
connection with the up-front royalty payments were not shams, and
the cash payments should be recognized. Petitioners further
argue that there is no withholding applicable because the
significant event for withholding tax purposes was the lump-sum
payment in December 1987.
Respondent contends that the up-front payments were illusory
and shams, and, therefore, those payments were not subject to
withholding. Respondent asserts that the withholding would apply
later when petitioners repatriated the funds as dividends through
the guise of loan payments.
We concluded previously that the transactions in connection
with the up-front royalty payments were shams that were entered
into solely for tax-avoidance purposes. We agree with respondent
that the payments were illusory and are not subject to
withholding. We also agree that the amounts paid out as loan
payments on the transactions were dividends and were subject to
withholding when the payments were made. Accordingly,
respondent's determination is sustained.
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