- 104 -                                                   
            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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