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Antonio office is a material factor in the realization of the
loan interest for the taxable years in issue, such income is
considered to be allocable in its entirety to the San Antonio
office. Sec. 1.864-6(c)(1), Income Tax Regs.
Accordingly, because LTD satisfies the three tests regarding
its office or other fixed place of business, we conclude that its
foreign source loan interest is treated as effectively connected
income pursuant to section 1.864-6(b)(2)(ii)(d)(2), Income Tax
Regs., and section 864(c)(4)(B).
Nonetheless, any foreign source income deemed effectively
connected shall not be treated as effectively connected if such
income, assuming it were derived by the taxpayer from sources
within the United States for the taxable year, would not be
treated as effectively connected pursuant to the rules for U.S.
source income. Sec. 1.864-5(a), Income Tax Regs. Accordingly,
we must analyze whether LTD’s loan interest, if it were U.S.
source income, would be effectively connected income.
LTD’s loan interest, if U.S. source, would be 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, would fall 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. Consequently, we analyze LTD’s
loan interest pursuant to either the asset-use or business-
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