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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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