- 170 -
Consequently, we hold that all of LTD's commissions and fees,
except the foreign source TVA commissions, are effectively
connected income pursuant to section 1.864-4(c)(5)(vi)(b), Income
Tax Regs., and section 864(c)(2)(B).
C. Whether LTD and INC are Liable
for Withholding Tax
1. Background
Respondent seeks to impose a withholding tax on three types
of income items paid by LTD to its clients. The first type of
income item, interest paid by LTD to its clients on investments
made in LTD’s name in U.S. certificates of deposit or bank
deposits, consists of interest paid on IFF and MMA investments
during the calendar years 1984 through 1989 (U.S. pooled
investments). The second type of income item, interest paid by
LTD to its clients from investments made in LTD’s name in foreign
banks, consists of interest paid on Asset Management Account,
Eurodeposits, InverCedes, InverCede2, Liquid Assets, Special
Accounts, Term Deposits, Pace, and MMA II investments21 during
21
As we have noted, supra pp. 56-59, the parties stipulated
the amounts on which LTD is potentially liable for withholding
tax. Respondent argues that the withholding tax should be
imposed on "interest paid or credited to accounts of clients
which was earned on funds of clients pooled and invested in LTD’s
name." Based on facts disclosed by the record, we believe that
the interest listed as a "Special Accounts" expense consists of
interest paid by LTD to various other LTD accounts. Thus, the
interest paid to "Special Accounts" does not fall within
respondent’s withholding tax argument. Petitioners, however, did
not contest either the stipulation or respondent’s argument.
Consequently, we will observe the parties’ stipulation and
(continued...)
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