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4. Discussion of Interest
a. Pre-1986 Act Years
(1) Application of the Character
and Source Rules for Interest
Petitioners argue that the interest received by LTD’s
clients is interest on deposits with persons carrying on the
banking business. Accordingly, petitioners argue that the
interest is income from sources without the United States. On
the other hand, respondent argues that the interest received by
LTD’s clients is paid by LTD as obligor and is therefore treated
as income from sources within the United States.
We have concluded supra p. 165, that the interest paid to
LTD’s clients from pooled investments retains its character in
the hands of LTD’s clients. Because respondent’s source argument
presumes that LTD was the obligor of the interest, we find that
argument to have no merit.
As to the U.S. certificates of deposit and bank deposits
(the only pooled investments made by LTD during the pre-1986 Act
years), we conclude that the interest from such investments is
treated as income from sources without the United States. The
IFF and MMA investments consisted of certificates of deposit and
bank deposits with U.S. banks and were therefore "other interest-
bearing obligations of residents, corporate or otherwise" within
the meaning of section 861(a)(1) and the regulations thereunder.
Consequently, the interest from such obligations is generally
treated as income from sources within the United States. Sec.
861(a)(1).
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