- 142 -
the active conduct of a servicing business. Consequently, we
apply the business-activities test to decide whether such income
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 have held, supra pp. 130-131,
that the investment portfolio management exception is
inapplicable and, consequently, that LTD’s activities relating to
the management of investment portfolios shall be treated as
activities of LTD’s trade or business conducted in the United
States for purposes of applying the business-activities test.
In applying the business-activities test to decide whether
LTD’s income from U.S. certificates of deposit and bank deposits
is effectively connected income, we must consider whether "the
activities of such trade or business were a material factor in
the realization of the income". Sec. 864(c)(2)(B). We have
held, supra p. 98, that LTD was engaged in "trade or business
within the United States" pursuant to section 864(b) during its
taxable years in issue. The activities of LTD's trade or
business relating to its income from U.S. certificates of deposit
and bank deposits included receiving clients’ funds, depositing
the funds in the client clearing account, either purchasing a
certificate of deposit from a U.S. bank or keeping the funds in
Page: Previous 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 NextLast modified: May 25, 2011