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interest from either certificates of deposit or bank deposits on
behalf of its clients, LTD paid to its clients their respective
portions of the interest and retained only LTD’s spread.
Accordingly, we conclude that LTD should include in its income
only the amounts that it retained as interest spreads from
certificates of deposit and bank deposits.
As to the character of the income, we agree with petitioners
that LTD’s portion of the interest income is compensation for
services. We conclude that LTD functioned in a manner not unlike
LACO in Estate of Smith. LTD placed clients’ funds in
certificates of deposit and bank deposits in the client’s own
name and in LTD’s name. LTD’s only expectation of income was
from the management of its clients’ moneys, for which it received
a management fee, as discussed supra pp. 100-101. The rate
spreads that LTD retained also derived from placing its clients’
funds in certificates of deposit and bank deposits. Accordingly,
we conclude that such income was compensation for services.
Based on the record, we believe that the activities from
which LTD earned its interest spreads were services that were
performed in San Antonio. Petitioners argue that the investment
management services performed in Mexico (i.e., the counseling of
clients) produced the income in issue. We disagree. As we view
the evidence in the instant case, we conclude that the most
important activity in producing the interest spread income was
the actual placing of funds in the certificates of deposit or the
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