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characterized as passive income for the purpose of computing
petitioner’s foreign tax credit limitation.
2. Petitioner’s Position That Royalties Received Are
General Limitation Income
Petitioner makes three arguments in support of its position
that the royalties received should not be treated as passive
income. Firstly, petitioner argues, treating royalties received
from L’Air as passive basket income impermissibly discriminates
against petitioner in violation of the nondiscrimination article
of the U.S.-France Treaty. Secondly, petitioner argues, the
“reserved” paragraph in section 1.904-5(i)(3) Income Tax Regs.,
when read in the relevant regulatory context and in light of
public written statements, mandates that royalties such as those
at issue be categorized as general limitation income. Thirdly,
petitioner argues, senior Treasury officials have stated clearly
in writing that the Department of the Treasury will shortly issue
regulations under which the subject royalties are categorized as
general limitation income. To date, no such retroactive
regulations have been issued. However, on January 3, 2001, the
Department of the Treasury published proposed rules that, among
other things, “propose to amend prospectively � 1.904-4(b)(2)”,
Income Tax Regs. 66 Fed. Reg. 319, 320 (emphasis added). The
supplementary information accompanying the proposed regulation
states:
Treasury and the IRS have consistently declined to extend
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