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performed work for FIL outside of the United States during the
years in issue, respondent avers that the payments constitute
U.S. source income.
As regards the payments to DPP, respondent again contends
that petitioners should be bound by their representations that
such sums were in the nature of compensation for services.
Respondent further argues, however, that the funds are properly
characterized as income to DPC, not DPP. In respondent’s view,
the alleged termination of the 1980 assistance agreement and the
creation of DPP were merely a scheme to eliminate corporate level
tax, unaccompanied by actual change in the entities’ relationship
and evidenced through continued adherence to the 15-percent
payment formula. Hence, according to respondent, the amounts
reported by individual family members must be viewed as
constructive dividends from DPC and, consequently, as U.S. source
income from a domestic corporation.
Given the above designation of both types of payments as
U.S. source income, respondent disallows petitioners’ claimed
foreign tax credits. Respondent also denies such credits on the
alternative basis that petitioners have failed to establish that
the Israeli withholding is a creditable tax. In addition,
respondent argues that DPC is liable for corporate level tax on
the amounts reported by DPP.
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