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States" pursuant to section 864(b) for its taxable years June 30,
1985 through 1989.
B. Whether Each Item of LTD's Income
Was Effectively Connected
1. Character and Source Rules
Before deciding whether an item of income is "effectively
connected with the conduct of trade or business within the United
States" pursuant to section 882(a)(1), we must first decide the
character and source of each item of income. Items of income
include, inter alia, personal services income and interest
income. Secs. 861(a) and 862(a). An item may be classified as
income from sources within the United States pursuant to section
861, as income from sources without the United States pursuant to
section 862, or as income partly from within and partly from
without the United States pursuant to section 863(b).
Generally, income from the performance of personal services
has its source where the services are performed. Absent an
exception not applicable in the instant case, compensation for
labor or personal services performed in the United States is
treated as income from sources within the United States. Sec.
861(a)(3). Compensation for labor or personal services performed
without the United States is treated as income from sources
without the United States. Sec. 862(a)(3).
For LTD's taxable years ended June 30, 1985 and 1986,
generally, the source of interest depends on the residence of the
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