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Generally, interest from foreign corporations is not treated as
income from sources within the United States pursuant to section
861(a)(1) and is therefore treated as income from sources without
the United States. Sec. 862(a)(1).
2. Application of the Character and Source Rules
a. Management Fees
Petitioners contend that the management fees received by LTD
are personal services income because such fees are compensation
for investment services. Petitioners argue that such services
included investment advice and related financial services that
LTD performed in managing the clients’ portfolios in Mexico.
Petitioners argue that the persons performing the services were
the promoters and advisers working in district offices in Mexico.
Petitioners contend that the management fees should be treated as
income from sources without the United States because the
services relating to the fees were provided in Mexico.
Respondent concedes that the management fees are personal
services income because the fees are compensation for investment
services. Respondent, however, contends that the management fees
should be treated as income from sources within the United States
because the services relating to the management fees were
provided in San Antonio.
In deciding whether the management fee income is from
sources within or from sources without the United States, we must
analyze the relationship LTD had with its clients. The primary
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