- 18 -
close relationship of the various corporations involved. Compare
Gaw v. Commissioner, T.C. Memo. 1995-531, on appeal (D.C. Cir.,
May 20, l996).
Rather, respondent focuses her argument solely on the
proposition that, since the royalties paid by SDI USA to
petitioner were U.S. source income, they retained that character
as part of the royalties paid by petitioner to SDI Bermuda and,
as a matter of law, constitute income "received from sources
within the United States by" SDI Bermuda under section 881(a).14
Respondent contends that the fact that such royalties were
combined with non-U.S. source royalties received by petitioner to
determine the amount of royalties payable by petitioner to SDI
Bermuda does not preclude the tracing of the royalties received
by petitioner from SDI USA to U.S. sources. To implement such
tracing, respondent simply applies the percentage specified in
the worldwide license agreement between petitioner and SDI
Bermuda and utilized in computing the amount of the required
payment by petitioner to SDI Bermuda. To support her contention
that such an allocation is permissible, respondent cites
Wodehouse v. Commissioner, 15 T.C. 799 (1950); Rohmer v.
Commissioner, 14 T.C. 1467 (1950); Rohmer v. Commissioner, 5 T.C.
14 At no time has respondent contended that petitioner has
failed to carry its burden of proof in respect of the factual
foundations of this legal issue.
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