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c. Interest Income
(1) Loans
Petitioners contend that the loan interest is not
effectively connected income because the activities occurring in
INC's office were not the "material factor" underlying the
interest income. Petitioners argue that, because INC's only role
in handling the loans to clients was to note that a loan had been
extended and to record the rate agreed between the promoter and
client in Mexico, INC’s activities do not rise to the level of
conducting "a banking, financing, or similar business within the
United States" within the meaning of section 1.864-4(c)(5)(i),
Income Tax Regs.
Respondent contends that the interest from loans is interest
income from sources without the United States. Respondent
contends that such income is effectively connected income because
it falls under one of the types of foreign source income that is
deemed effectively connected pursuant to section
864(c)(4)(B)(ii). Additionally, respondent argues that the San
Antonio office was a material factor in the production of the
interest from loans.
We have held, supra p. 110, that the loan interest is
characterized as interest income and is treated as income from
sources without the United States. Because petitioners’
effectively connected argument presumes U.S. source income, we
find that argument to have no merit. Additionally, we need not
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