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certificates of deposit and term deposits consists of service
fees derived in the active conduct of a servicing business.
Consequently, we apply the business-activities test to decide
whether such interest 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 management portfolio 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 non-U.S. certificates of deposit and term
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 non-U.S. certificates of
deposit and term deposits included receiving clients’ funds,
depositing such funds in the client clearing account, either
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