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earned on pooled investments, LTD retained only the spread that
it was able to negotiate. Accordingly, we conclude that, as to
its pooled investments program, LTD was not the obligor in its
relationship with its clients.
Because we do not view LTD as the obligor, we treat the U.S.
and foreign banks as the obligors of the interest on pooled
investments paid by LTD to LTD’s clients. Additionally, we treat
the interest as retaining its underlying character in the hands
of LTD’s clients as interest from such U.S. and foreign banks.
We turn next to whether LTD and INC are withholding agents
liable for withholding tax on the interest derived from U.S. and
foreign banks and paid by LTD/INC to LTD’s clients. The Tax
Reform Act of 1986 changed the statutory mechanism for exempting
from tax the interest earned on "deposits with persons carrying
on the banking business", effective for "payments made in a
taxable year of the payor beginning after December 31, 1986."
Tax Reform Act of 1986 (1986 Act), Pub. L. 99-514, sec. 1214
(c)(5) and (d)(1), 100 Stat. 2543.23
In the instant case, the interest from U.S. and foreign
banks was paid by LTD to its clients during the calendar years
1984 through 1989. Source rules for interest are generally
23
Sec. 1012(g)(1) of the Technical and Miscellaneous Revenue
Act of 1988, Pub. L. 100-647, 102 Stat. 3500, retroactively
provided the effective date of the Tax Reform Act of 1986 (1986
Act), Pub. L. 99-514, sec. 1214(c)(5), 100 Stat. 2543, as if
included in the 1986 Act.
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