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On its income tax returns for 1980 through 1986, P
claimed a foreign tax credit under sec. 901, I.R.C., for
the purported withholding tax payments made by the
Central Bank and other Brazilian borrowers on their net
loan interest remittances to P.
1. Held: The withholding tax paid by non-tax-
immune Brazilian borrowers is potentially creditable to
P but must be reduced, under sec. 4.901-2(f)(3)(ii),
Temporary Income Tax Regs., 45 Fed. Reg. 75653 (Nov. 17,
1980), and sec. 1.901-2(e)(3)(ii), Income Tax Regs., by
the pecuniary benefit the borrowers received from the
Brazilian Government. Nissho Iwai Am. Corp. v.
Commissioner, 89 T.C. 765 (1987); Norwest Corp. v.
Commissioner, T.C. Memo. 1992-282, affd. 69 F.3d 1404
(8th Cir. 1995); Continental Ill. Corp. v. Commissioner,
T.C. Memo. 1988-318, affd. without published opinion sub
nom. Citizens & S. Corp. & Subs. v. Commissioner, 919
F.2d 1492 (11th Cir. 1990), affd. in part and revd. in
part 998 F.2d 513 (7th Cir. 1993), followed.
2. Held, further: P is not legally liable for
Brazilian tax on the Brazilian restructuring debt
interest remittances it received from the Central Bank.
Under Brazilian law, P was not required to pay Brazilian
tax, and neither it nor the Central Bank had a legal
liability to pay the withholding tax. The purported
Central Bank withholding tax payments are not creditable
to P because these purported payments were noncompulsory
amounts and not a tax to Brazil. Sec. 1.901-2(e)(1),
(5), Income Tax Regs.
Joel V. Williamson, Thomas C. Durham, Scott M. Stewart,
Richard M. Timmel, Patricia Anne Flaming, and Kim Marie Boylan, for
petitioner.
Theodore J. Kletnick, William G. Merkle, Diane P. Thaler, Paul
S. Manning, Rajiv Madan, Mary Ann Amodeo, and Janice E. Lamartine,
for respondent.
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