SDI Netherlands B.V., f.k.a. SDI International B.V. - Page 1

                                      107 T.C. No. 10                                        

                                 UNITED STATES TAX COURT                                     

                               SDI NETHERLANDS B.V., f.k.a.                                  
                          SDI INTERNATIONAL B.V., Petitioner v.                              
                      COMMISSIONER OF INTERNAL REVENUE, Respondent                           

                Docket No. 23747-94.             Filed October 2, 1996.                      

                     P was the licensee of a Bermuda corporation (SDI                        
                Bermuda) of worldwide rights to use computer software.                       
                P in turn licensed those rights for use in the United                        
                States to a U.S. corporation (SDI USA).  P received                          
                royalties from SDI USA as well as from other licensees.                      
                P paid specified percentages of the royalties it                             
                received from its licensees to SDI Bermuda.  P, SDI                          
                USA, and SDI Bermuda were members of a group of                              
                corporations under common control.  Held, the two                            
                licenses were separate and distinct from each other                          
                with the result that the royalties paid to P by SDI USA                      
                did not retain their U.S. source character as part of                        
                the royalties paid by P to SDI Bermuda.  Consequently,                       
                they were not income "received from sources within the                       
                United States by" SDI Bermuda within the meaning of                          
                sec. 881 (a), I.R.C., so as to subject P to withholding                      
                tax as provided in secs. 1441(a) and 1442(a), I.R.C.                         

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