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We must decide whether royalties received by petitioner, a
domestic corporation, from its foreign parent should be
classified as section 904(d)(1)(A) passive income or as section
904(d)(1)(I) general limitation income for purposes of
determining petitioner’s foreign tax credit. We hold that they
are section 904(d)(1)(A) passive income.
Background
Petitioner’s principal place of business was located in
Walnut Creek, California, when the petition was filed. American
Air Liquide, Inc. (AAL), is the common parent of a group of
corporations that filed consolidated returns in the years in
issue. Liquid Air Corp. (LAC) is a member of AAL’s affiliated
group.
L’Air Liquide, S.A. (L’Air), is a French corporation that is
the ultimate parent of petitioner. L’Air produces, sells, and
distributes industrial gases, related equipment and services, and
welding products throughout the world through its own operations
in France and through its French and non-French subsidiaries.
In 1986, AAL acquired the LAC research facilities and rights
to all technical information developed, or being developed, by
LAC. Under various license agreements among AAL, LAC, and L’Air,
AAL and LAC received royalties of $4,775,000, $5 million, and
$4,800,000 from L’Air in 1989, 1990, and 1991, respectively. The
royalties were paid by L’Air for nonexclusive, irrevocable, and
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