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(as defined in section 954(c)).” Subparagraph (A) of section
954(c)(1) defines “foreign personal holding company income” to
include “Dividends, interest, royalties, rents, and annuities.”
Respondent focuses on the facts that section 904(a)(1)
places passive income into a passive basket and that “royalties”
are specifically referred to in section 954(c)(1) as a type of
passive income. Petitioner expands on this focus by reference to
section 904(d)(3)(C) and section 1.904-5, Income Tax Regs., which
together apply a look-through rule in the case of controlled
foreign corporations and other entities. Section 904(d)(3)(C)
provides:
Any interest, rent, or royalty which is received or accrued
from a controlled foreign corporation in which the taxpayer
is a United States shareholder shall be treated as income in
a separate category to the extent it is allocable (under
regulations prescribed by the Secretary) to income of the
controlled foreign corporation.
Section 1.904-5(b), Income Tax Regs., provides:
In general. Except as otherwise provided in section
904(d)(3) and this section, dividends, interest, rents,
and royalties received or accrued by a taxpayer from a
controlled foreign corporation in which the taxpayer is
a United States shareholder shall be treated as general
limitation income.
Section 1.904-5(i)(3), Income Tax Regs., is also relevant to
petitioner’s analysis. It is entitled “Special rule for payments
from foreign parents to domestic subsidiaries” and contains no
text. The Secretary explicitly “[RESERVED]” the rules under that
provision during the years in issue. In 1992 the Secretary
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