SDI Netherlands B.V., f.k.a. SDI International B.V. (1996)

107 T.C. No. 10

UNITED STATES TAX COURT SDI NETHERLANDS B.V., f.k.a.

SDI INTERNATIONAL B.V., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 23747-94. Filed October 2, 1996.

P was the licensee of a Bermuda corporation (SDI Bermuda) of worldwide rights to use computer software. P in turn licensed those rights for use in the United States to a U.S. corporation (SDI USA). P received royalties from SDI USA as well as from other licensees. P paid specified percentages of the royalties it received from its licensees to SDI Bermuda. P, SDI USA, and SDI Bermuda were members of a group of corporations under common control. Held, the two licenses were separate and distinct from each other with the result that the royalties paid to P by SDI USA did not retain their U.S. source character as part of the royalties paid by P to SDI Bermuda. Consequently, they were not income "received from sources within the United States by" SDI Bermuda within the meaning of sec. 881 (a), I.R.C., so as to subject P to withholding tax as provided in secs. 1441(a) and 1442(a), I.R.C.

Arthur D. Pasternak, Douglas R. Cox, and Jeffrey A. Fiarman, for petitioner.

Karen E. Chandler and Kristine A. Roth, for respondent.

OPINION TANNENWALD, Judge: Respondent determined deficiencies in Federal withholding taxes and additions to tax as follows:

Additions to Tax Year Deficiency Sec. 6651(a)(1)11987 $678,449 $169,612 1988 881,067 220,267 1989 825,513 206,378 1990 641,837 160,459 The issue in dispute is whether petitioner, a corporation organized under the laws of the Kingdom of The Netherlands, is liable for withholding taxes on royalties paid to a Bermuda corporation, and additions to tax for failure to file Forms 1042 for each of the years in issue.

All the facts have been stipulated. The stipulation of facts and attached exhibits are incorpora...

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