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183 (1945), affd. 153 F.2d 61 (2d Cir. 1946); Estate of Marton v.
Commissioner, 47 B.T.A. 184 (1942); Molnar v. Commissioner, 156
F.2d 924 (2d Cir. 1946), affg. a Memorandum Opinion of this
Court. In all of these cases, however, the payments, upon which
a withholding tax was imposed, were directly from a U.S. payor
and the U.S. withholding tax was imposed on that payor. None of
them address the situation involved herein, where there is a
second licensing step under which royalties are being paid and
upon which the U.S. withholding tax is sought to be imposed.
Thus, these cases provide no guidance in respect of whether the
U.S. source characterization of the royalties paid by SDI USA to
petitioner flows through to the royalties paid by petitioner to
SDI Bermuda.
Petitioner argues that the royalties paid by SDI USA to
petitioner and exempt from tax under the Netherlands treaty
became merged with the other royalties received by petitioner
from non-U.S. sources and consequently lost their character as
U.S. source income. Petitioner submits that, while the royalty
payments from SDI USA may be U.S. source income, its royalty
payments to SDI Bermuda were made on a separate and independent
basis. With respect to the payments to SDI Bermuda, petitioner
contends that they were made pursuant to a worldwide licensing
agreement between two foreign corporations, and as such do not
constitute income "received from sources within the United
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