Inverworld, Inc., et al. - Page 77

                                                - 160 -                                                   
            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                               
            MMA II interest pursuant to either the asset-use or business-                                 
            activities test.  Id.                                                                         
                  We have held, supra pp. 146-147, that LTD is “a dealer in                               
            stocks or securities” within the meaning of section 1.864-                                    
            4(c)(3)(i), Income Tax Regs.  Accordingly, LTD’s MMA II interest                              
            is interest derived by a dealer of stocks or securities within                                
            the meaning of section 1.864-4(c)(3)(i), Income Tax Regs.                                     
            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 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 MMA II 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.                                      




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