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all persons * * * having the control, receipt, custody,
disposal, or payment of any of the items of income
specified in subsection (b) [which includes
"royalties"] (to the extent that any of such items
constitutes gross income from sources within the United
States), of any nonresident alien individual or of any
foreign partnership shall * * * deduct and withhold
from such items a tax equal to 30 percent thereof * * *
There can be no dispute that the royalty payments received
by petitioner from SDI USA constitute U.S. source income and were
received by petitioner as such within the meaning of section
1442(a). See Commissioner v. Wodehouse, 337 U.S. 369 (1949); see
also Estate of Marton v. Commissioner, 47 B.T.A. 184 (1942).
However, royalties paid by SDI USA to petitioner are exempt from
taxation by virtue of section 894 and article IX of the United
States-Netherlands Income Tax Convention, April 29, 1948, 62
Stat. 1757, 1762, 1950-1 C.B. 92, as amended by the Supplementary
Protocol, June 15, 1955, 6 U.S.T. 3696, 1956-2 C.B. 1116, and as
further amended by the United States-Netherlands Supplementary
Income Tax Convention, Dec. 30, 1965, 17 U.S.T. 896, 1967-2 C.B.
472 (U.S.-Netherlands treaty); see also sec. 894. There is no
comparable U.S. treaty exemption that would apply to royalty
payments from petitioner to SDI Bermuda.
The parties have locked horns on several aspects of the
application of the statutory provisions in light of the impact of
the U.S.-Netherlands treaty exemption: (1) Whether the royalties
paid by petitioner to SDI Bermuda constitute income "received
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