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made by LTD's clients were for their own account and risk and did
not establish a debtor-creditor relationship between LTD and its
clients or a shareholder-corporation relationship between the
clients and the pooled investment accounts. Petitioners contend
that, because the risk of loss always remained with the client,
the mere act of combining two or more clients' funds to purchase
a larger certificate of deposit did not create a "mutual fund".
Petitioners rely on Estate of Smith v. Commissioner, 33 T.C.
465 (1959). Petitioners argue that neither LTD nor INC was the
“obligor” of the interest earned in LTD’s name and paid to LTD’s
clients from pooled investments. Petitioners contend that the
relation among LTD/INC, the client, and any investment were the
same whether the investment was purchased in the client’s name
or, by pooling, in LTD’s name. Petitioners argue that the
interest "flowed through" INC and/or LTD and retained its
underlying character in the hands of LTD’s clients. Accordingly,
petitioners contend that, in the case of a pooled investment in a
U.S. certificate of deposit or bank deposit, the interest was
statutorily exempt from withholding, and, in the case of a pooled
investment in a non-U.S. certificate of deposit or term deposits,
the interest was foreign source, not subject to U.S. taxation of
any kind.
Respondent, however, argues that the obligor in LTD’s pooled
22(...continued)
withholding tax as portfolio interest pursuant to secs. 871(h)
and 881(c). Consequently, we do not consider such argument.
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