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C. The Payments to DPP
Turning to the payments from FIL to DPP, we first observe
that both petitioners and respondent seek to diverge to some
degree from the “form” or apparent import of the documentary
record. Petitioners assert that the payments were properly
included as income of DPP but should be treated as dividends from
FIL for purposes of computing their foreign tax credits.
Although no Israeli taxes were withheld on these payments, their
characterization as U.S. or foreign source income is significant
in that the amount of the foreign tax credit available for taxes
that were paid depends upon the overall proportion of U.S. to
foreign source income. Respondent avers that the amounts should
be treated in accordance with representations that they
constituted compensation for services but that such income was
earned by and taxable to DPC, rather than DPP, and was received
by petitioners as a constructive dividend from DPC.
Nonetheless, the parties have stipulated that if we find the
payments from FIL “were properly reported by DPP”, petitioners
will be permitted to treat them as dividends from FIL. We
therefore begin with this issue, but we note our reservations
about the seeming facial inconsistency of this statement. Since
DPP reported the amounts as “Ordinary income (loss) from trade or
business activities” on its Forms 1065, and listed the type of
income as “consulting” on the attached Schedules K, treatment as
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