- 176 -
applied based upon the obligor’s taxable year. The parties,
however, did not present evidence regarding the taxable years of
the U.S. and foreign banks that paid the interest in issue.
Nonetheless, our holdings, infra pp. 175-181, that the exemption
for interest on "deposits with persons carrying on the banking
business" applies in the instant case obviate the need to inquire
into the taxable years of the U.S. and foreign banks because
under both pre-1986 Act law and post-1986 Act law, the result is
the same: LTD and INC are not liable as withholding agents for
withholding tax.
Post-1986 Act law applies to payments made in taxable years
of the U.S. and foreign banks beginning after December 31, 1986.
We must therefore examine both regimes of law.
a. Pre-1986 Act Law
(1) Character and Source
Rules for Interest
Generally, the source of interest depends on the residence
of the obligor. Interest on bonds, notes, or other interest-
bearing obligations of U.S. residents, corporate or otherwise, is
generally treated as income from sources within the United
States. Sec. 861(a)(1). The term "resident of the United
States", used in section 1.861-2(a)(1), Income Tax Regs., which
was promulgated pursuant to section 861(a)(1), includes, inter
alia, "a foreign corporation or a foreign partnership, which at
any time during its taxable year is engaged in trade or business
in the United States." Sec. 1.861-2(a)(2)(iv), Income Tax Regs.
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