American Air Liquide, Inc. v. Commissioner of Internal Revenue

MEMORANDUM *

American Air Liquide, Inc. (“American Air”) appeals the IRS’s notices of deficiency and argues that (1) the royalties should be considered general limitation income under the relevant statutory and regulatory framework, and (2) federal law and regulations establishing eligibility for the look-through exception impermissibly discriminate against American Air because of its French parent company in violation of a U.S.-France tax treaty. We reject both arguments and affirm the decision of the Tax Court.

The Internal Revenue Code generally classifies royalty income from a foreign source in the passive income basket. American Air, however, claims that two exceptions provided by the Code and corresponding Treasury Regulations apply in its case: the active business exception and the look-through exception. We disagree and find that neither exception applies.

The active business exception has two requirements: (1) the royalties must derive from the active conduct of business, and (2) the royalties must be received from an unrelated person. See 26 C.F.R. § 1.904 — 4(b)(2) (i); see also 26 U.S.C. § 954 (c)(2)(A). The royalties in this case, paid by L’Air and received by…