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Petitioners also never reported the amounts as dividends on their
Schedules B, although as noted previously, sums from other of
their partnership entities were so listed.
Further, with few exceptions petitioners’ returns
inexplicably characterize the DPP income as derived from a
foreign source in 1991, 1993, and 1994, but not in 1992.
Moreover, the returns claiming foreign source treatment
repeatedly place the payments in the “General limitation income”
category, rather than in the “Passive income” category. Based on
the aforementioned instructions for Form 1116, such a choice is
not consistent with the payments’ being in the nature of
dividends but is appropriate for compensation.
Documentation pertaining to DPP and FIL is similarly devoid
of any hint that the payments were dividends as opposed to
compensation. Combined financial statements including DPP show
the amounts as “consulting income” earned from FIL. In addition,
DPP’s returns and Schedules K report the payments as “Ordinary
income (loss) from trade or business activities” and specify the
type of income as “consulting”.
FIL likewise reported and deducted the payments as “selling
expenses” on its financial statements and tax returns, and no
dividend is recorded thereon as having been paid. Furthermore,
the conclusions of the Israeli authorities regarding the payments
to DPP were identical to those reached about the special
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