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v. Commissioner, 56 T.C. 228, 244 (1971); sec. 1.861-4(a), Income
Tax Regs.
U.S. Source Income
Petitioner insists that the amounts paid by the partnerships
are not U.S. source FDAP to A-Alpha. We agree. When the payment
for services was made by the limited partnerships, it was made to
A-Alpha, a Hong Kong limited liability corporation. At the time
of payment, no part of it was U.S. source income of A-Alpha, for
no part of the contract had been performed in the United States.
Until A-Alpha performed some of the services in the United
States, there could not be any U.S. sourced income attributable
to A-Alpha.
Respondent argues that the issue revolves around the
research and development activities performed in the United
States by ESC. Accordingly, respondent contends that the U.S.
sourcing requirement of section 881(a) is satisfied. We
disagree. While it is true that amounts received in exchange for
services are sourced at the place of performance of those
services, such performance gives rise to income to the performer
of those services. The performer of the services in this case
was ESC. The fact that a lower tier corporation performs some
services in the United States is insufficient to support a
conclusion that its higher tier parent corporation also performs
services in the United States. The two corporations are and
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