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financing, or similar business. Sec. 1.864-4(c)(5)(vi)(b),
Income Tax Regs. Accordingly, we analyze LTD’s U.S. source
currency transactions income pursuant to either the asset-use or
business-activities test. Id.
The business-activities test is of primary significance
under circumstances, inter alia, where "service fees are derived
in the active conduct of a servicing business." Sec. 1.864-
4(c)(3)(i), Income Tax Regs. LTD’s U.S. source currency
transactions income consists of service fees derived in the
active conduct of a servicing business. Consequently, we apply
the business-activities test to decide whether such income 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 U.S. source currency transactions income is effectively
connected income, we must consider whether "the activities of
such trade or business were a material factor in the realization
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