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881(c). Compensation, interest (other than "portfolio"
interest), dividends, and other fixed or determinable annual or
periodical gains, profits, and income are income items described
in section 871(a)(1) and section 881(a) and are therefore subject
to the section 864(c)(2) rules.
Section 864(c)(2) provides two general "factors" to consider
in determining whether income from sources within the United
States falling under its purview is effectively connected: (1)
Whether the income is derived from assets used in or held for use
in the conduct of the trade or business, sec. 864(c)(2)(A)
(asset-use test), and (2) whether the activities of the trade or
business were a material factor in the realization of the income,
sec. 864(c)(2)(B) (business-activities test). A special regime
applies pursuant to section 864(c)(2), however, in determining
whether the income of taxpayers "engaged in the active conduct of
a banking, financing, or similar business in the United States"
is effectively connected. Sec. 1.864-4(c)(5), Income Tax Regs.
All income from sources within the United States other than
that covered by section 864(c)(2) or section 1.864-4(c)(5),
Income Tax Regs., falls into the residual category of section
864(c)(3) and is treated as effectively connected with any U.S.
trade or business conducted by the taxpayer (regardless of
whether an actual connection exists).
Certain income from sources without the United States is
also deemed effectively connected if such income is attributable
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