- 13 -
argument by respondent to the contrary, we treat all transactions
between ESC and A-Alpha as being conducted at arm's length.12
The relationship between A-Alpha and ESC is essentially no
different, for our purposes, than a contract between ESC and an
unrelated independent contractor.
ESC was capable of making payments that constituted FDAP
taxable under section 881(a), but, in order for liability to
attach, there must have been a distribution of FDAP income by ESC
to A-Alpha, whether actual or deemed. Respondent has not
determined that a reallocation or recharacterization of
intercompany transactions between ESC and A-Alpha is necessary
pursuant to section 482, and respondent does not allege that ESC
made any actual payments to A-Alpha.
We conclude that A-Alpha did not receive any U.S. source
income from the U.S. limited partnerships, and therefore the
payments made by the various U.S. limited partnerships are not
subject to tax under section 881.
Fixed or Determinable Annual or Periodic Gains, Profits, or
Income
Furthermore, even if a portion of the payments made by the
limited partnerships were U.S. source, it was not FDAP because it
was unascertainable during the year of payment what portion of
12 ESC billed A-Alpha for the work it performed at cost
plus 5 percent. If this was below fair market value for the type
of services performed, an avenue of attack by respondent is sec.
482.
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