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D. Amounts That MANV, MSI, and MDT Paid to Eurotor as
Management and Consulting Fees
Petitioners argue that the management and consulting fees
that were paid to Eurotor represent income effectively connected
with the conduct of Eurotor's trade or business; that the income
was reported on income tax returns filed by Eurotor in the United
States; and, therefore, that no income tax withholding was
required under section 1442(a).
Respondent contends that the amounts paid were for services
or dividends and, because they are U.S. source income, are
subject to the withholding.
Section 1441(c)(1) provides an exception to the withholding
rules under sections 1441 and 1442:
(1) Income connected with United States
business.--No deduction or withholding under subsection
(a) shall be required in the case of any item of income
(other than compensation for personal services) which
is effectively connected with the conduct of a trade or
business within the United States and which is included
in the gross income of the recipient * * * for the
taxable year.
Section 1442(a) incorporates the section 1441(c) exclusion
as it applies to corporations. We have previously concluded that
the management and consulting fees paid to Eurotor were
reasonable and for management services as required by section
162, and, accordingly, we have allowed the deductions. As
petitioners point out, the income must be effectively connected
with a trade or business and included in the gross income of the
recipient. Eurotor's Federal tax returns for fiscal years ended
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