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activities test only by implication, we are convinced that the
test is properly applied to the management fee.
LTD’s management fee is any "income, gain, or loss from
sources within the United States" not already described in the
first two categories of U.S. source income and, therefore, falls
under the third category of U.S. source income of a foreign
corporation engaged in the active conduct of a banking,
financing, or similar business. Sec. 1.864-4(c)(5)(vi)(b),
Income Tax Regs. Accordingly, we analyze LTD’s management fee
pursuant to either the asset-use or business-activities test.
Id.
The business-activities test is of primary significance
under circumstances, inter alia, where "service fees are derived
in the active conduct of a servicing business". Sec. 1.864-
4(c)(3)(i), Income Tax Regs. LTD’s management fee is a service
fee derived in the active conduct of a servicing business.
Consequently, we apply the business-activities test to decide
whether such fee is effectively connected income.
Before applying the business-activities test, however, we
must address the exception for activities relating to the
management of investment portfolios provided in section 1.864-
4(c)(3)(i), Income Tax Regs. We hold that such exception is
inapplicable because the maintenance of investments constitutes
the principal activity of LTD's trade or business within the
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