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that "only the client’s principal had been invested."
Petitioners argue that the mere act of pooling "did not alter the
essential relation among LTD, its clients and the clients’
funds." Finally, petitioners argue that "LTD did not become an
owner, with the client, in the * * * [certificate of deposit]
purchased." In sum, petitioners argue that all interest payments
are bifurcated: the portion retained by LTD was compensation for
services, and the portion received by LTD’s clients was interest
income to the clients themselves and not to LTD.
As to the characterization of the "Interest Income",
petitioners contend that the income is personal services income.
Petitioners note that the income represents the portion of the
interest earned on pooled investment funds that was retained by
LTD pursuant to the discretionary authorization. Accordingly,
petitioners, relying on Estate of Smith, argue that the character
of such income is compensation for services and not a portion of
the investment income of the pooled funds. Petitioners contend
that the investment management services that produced such income
were performed in Mexico, and therefore such income should be
treated as income from sources without the United States.
Respondent’s primary argument is that the character of the
income is interest income from U.S. certificates of deposit and
bank deposits. Because such interest derived from a U.S.
obligor, respondent contends that, pursuant to the interest
source rules, the interest is treated as income from sources
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