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paid to LTD,19 including the interest that LTD ultimately paid
out to its clients. The "Direct Costs" included, primarily, the
interest that LTD paid out to its clients.
Petitioners contest the inclusion of the interest that LTD
paid out to its clients in LTD’s "Gross Receipts" and "Direct
Costs". Petitioners note that respondent imposes no tax on the
interest earned by LTD’s clients on certificates of deposit
purchased in their own name. Additionally, as to respondent’s
attempt to tax the interest earned on certificates of deposit
purchased in LTD’s name with the pooled funds of clients,
petitioners contend that the distinction in the name of the
instrument holder "does not justify the different tax treatment."
Petitioners, relying on Estate of Smith v. Commissioner, 313
F.2d 724 (8th Cir. 1963), affg. in part and revg. in part 33 T.C.
465 (1959), argue that the interest paid by LTD to its clients
should not be treated as gross income to LTD. Petitioners note
19
Although the parties did not differentiate among the four
types of interest income from U.S. certificates of deposit, we
observe that there are four types of income earned by LTD from
U.S. certificates of deposit and bank deposits: the byte, the
basis income, the IFF spread, and the MMA spread. The byte, the
basis income, and the IFF spread are income derived from LTD’s
certificates of deposit operation. U.S. banks paid interest on
LTD’s certificates of deposit directly to LTD, which held such
instruments in its own name. The byte, the basis income, and the
IFF spread constitute portions of such interest from U.S.
certificates of deposit. The MMA spread, however, is income
derived from LTD’s bank accounts. The U.S. banks paid interest
on LTD’s bank account directly to LTD, which held the account in
its own name. The MMA spread constituted a portion of such
interest from U.S. banks.
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