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OPINION
I. Contentions of the Parties
A. Petitioners’ Position
Petitioners primarily contend that both the special
commissions paid by FIL directly to members of the Deitsch family
and the payments from FIL to DPP are properly characterized as
dividend income from a foreign source. Petitioners maintain that
the nature or substance of the payments must be determined in
accordance with U.S. tax principles and that labels affixed for
Israeli reporting purposes are not conclusive.
With respect to the special commissions, petitioners claim
dividend treatment is appropriate because no services were
rendered by the recipients to FIL and because the amount of the
payments was so large as to make it unreasonable to view them as
compensation. Regarding the payments to DPP, petitioners aver
that because the agreement under which such sums were paid to DPC
for services was terminated prior to the years in issue, and
because DPC in fact provided no services to FIL during the 1991
through 1994 period, the payments were properly reported as
income to DPP. Furthermore, it is petitioners’ position that
since neither DPP nor the individual family members performed
services for FIL (with the exception of B. Mayer Zeiler who was
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