New York Guangdong Finance, Inc. - Page 13




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          respondent before he issued his notice of deficiency and                    
          therefore respondent was on notice that a portion of the reported           
          interest was not subject to U.S. income tax withholding under the           
          China Agreement.                                                            
               Petitioner’s argument ignores the fact that petitioner filed           
          Forms 1120X under penalties of perjury before respondent issued             
          the deficiency notice and 10 months after petitioner sent the               
          September 8, 1998, letter to its accountant.  The interest                  
          payments that petitioner reported on the Forms 5472 attached to             
          the Forms 1120X are inconsistent with the letter in several                 
          respects.  Respondent did not act capriciously or arbitrarily               
          when he determined on the basis of the residency of the interest            
          recipient (Hong Kong) and the amounts petitioner reported on its            
          Forms 5472 that petitioner had income tax withholding                       
          deficiencies.  We conclude, therefore, that the burden of proof             
          remains with petitioner.                                                    
          II.  Taxation of Interest Received by Foreign Corporations                  
               A.   Generally                                                         
               Except as provided in section 881(c), section 881(a) imposes           
          a tax of 30 percent on, inter alia, interest received from United           
          States sources by a foreign corporation12 to the extent the                 

               12A “foreign corporation” is a corporation that is not                 
          organized in the United States or under the law of the United               
          States or of any State.  Sec. 7701(a)(4) and (5).  GITIC was a              
          corporation organized under the laws of China, and GXE was a                
                                                             (continued...)           






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