Inverworld, Inc., et al. - Page 4

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                               d.    Section 864(c)(2)(B)                                                 
                                     Business-Activities Test ........ 129                                
                               e.    Section 864(c)(4)(B) Rules for Income                                
                                     From Sources Without the United States . 130                         
                        4.     Application of the Effectively                                             
                               Connected Income Rules ............ 135                                    
                               a. Management Fees ............. 136                                       
                               b. Service Fees .............. 139                                         
                                     (1) U.S. Certificates of Deposit                                     
                                           and Bank Deposits  . . . . . .... 139                          
                                     (2) Non-U.S. Certificates of Deposit                                 
                                           and Term Deposits  . . . . . . . .. 143                        
                                     (3) Pace Investments .......... 146                                  
                               c. Interest Income ............. 149                                       
                                     (1) Loans ............... 149                                        
                                     (2) MMA II ............... 157                                       
                               d.    Currency Exchange Transactions                                       
                                     Income (Currency Swaps                                               
                                     and Currency Transactions)  . . ..... 161                            
                               e. Sales Commissions and Fees ....... 164                                  
                                     (1) Foreign Source TVA Commissions ... 165                           
                                     (2) All Commissions and Fees Excepting                               
                                           the Foreign Source TVA Commissions . 166                       
                  C.    Whether LTD and INC are Liable                                                    
                        for Withholding Tax . . . . . . .......... 170                                    
                        1. Background .................. 170                                              
                        2. Withholding Tax on Interest ......... 171                                      
                               a. Pre-1986 Act Years ........... 176                                      
                                     (1) Character and Source                                             
                                           Rules for Interest . ........ 176                              
                                     (2) Taxation of Interest ........ 179                                
                               b. Post-1986 Act Years ........... 180                                     
                                     (1) Character and Source Rules                                       
                                           for Interest . . . . . . . ..... 180                           
                                     (2) Taxation of Interest ........ 181                                
                        3. Withholding Tax on Dividends ......... 183                                     
                               a.    Character and Source Rules                                           
                                     for Dividends . . . . . . . ....... 183                              
                               b. Taxation of Dividends .......... 183                                    
                        4. Discussion of Interest ............ 185                                        
                               a. Pre-1986 Act Years ........... 185                                      
                                     (1) Application of the Character                                     
                                           and Source Rules for Interest ... 185                          
                                     (2) Taxation of Interest ........ 188                                
                               b. Post-1986 Act Years ........... 189                                     
                                     (1) Application of the Character                                     
                                           and Source Rules for Interest ... 189                          
                                     (2) Taxation of Interest ........ 190                                





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