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States. Respondent contends that such income is effectively
connected income pursuant to the business-activities test because
the activities of LTD's U.S. business were a material factor in
the realization of the income.
We have held, supra p. 108, that the income from non-U.S.
certificates of deposit and term deposits is characterized as
compensation for 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.
LTD’s income from non-U.S. certificates of deposit and term
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 non-U.S. certificates
of deposit and term 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 non-U.S.
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