American Air Liquide, Inc. and Subsidiaries - Page 9

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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              
               Treasury and the IRS have consistently declined to extend              

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