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Income Tax Regs. Accordingly, we analyze LTD’s commissions and
fees 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 commissions and fees consist
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.
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 management portfolio 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 commissions and fees are 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
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