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We have held, supra pp. 106-107, that LTD's income from U.S.
certificates of deposit and bank deposits is characterized as
compensation for personal services and is treated as income from
sources within the United States. Accordingly, as petitioners'
first effectively connected income argument presumes foreign
source income, we find that argument to have no merit.
Additionally, because we apply the business-activities test, we
need not address petitioners’ arguments regarding the asset-use
test.
LTD’s income from U.S. certificates of deposit and bank
deposits 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 income from U.S. certificates of
deposit and bank deposits 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 income from U.S. certificates
of deposit and bank deposits consists of service fees derived in
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