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4(c)(5)(i), Income Tax Regs. Because section 1.864-5(b)(2)(i),
Income Tax Regs., applies the test articulated in section 1.864-
4(c)(5)(i), Income Tax Regs, we also hold that LTD was "engaged
in the active conduct of a banking, financing, or similar
business in the United States” within the meaning of section
1.864-5(b)(2)(i), Income Tax Regs. Accordingly, we apply the
special effectively connected income rules for a foreign
corporation considered to be so engaged.
a. Management Fees
Petitioners contend that the management fee is income from
sources without the United States. Petitioners contend that such
fee is not effectively connected income because it is not one of
the types of foreign source income that is deemed effectively
connected income pursuant to section 864(c)(4)(B) or (C).
Respondent contends that the management fee is income from
sources within the United States. Respondent applies the
business-activities test only by implication and contends that
the fee is effectively connected income.
We have held, supra p. 101, that the management fee is
characterized as compensation for personal services and is
treated as income from sources within the United States.
Accordingly, as petitioners' effectively connected income
argument presumes foreign source income, we find that argument to
have no merit. Although respondent applies the business-
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