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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
the loan interest 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 the loan interest included
receiving clients’ funds, lending such funds to other clients,
collecting the interest and principal from the loans, and
maintaining records of LTD’s and the clients’ positions with
respect to such loans. We conclude that such activities of LTD’s
trade or business were "a material factor in the realization of
the income" within the meaning of section 864(c)(2)(B). We have
given due regard to the question of whether such income was
accounted for through such trade or business, and we find LTD’s
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