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b. Post-1986 Act Years
(1) Application of the Character
and Source Rules for Interest
Petitioners argue that the interest received by LTD’s
clients retained its underlying character. Accordingly,
petitioners argue that the interest from U.S. pooled investments
received by LTD's clients is income from sources within the
United States and that the interest from non-U.S. pooled
investments 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 pursuant to
section 884(f)(1)(A).
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. pooled investments, we conclude that the
interest from such investments is treated as income from sources
within the United States. The interest from the IFF and MMA
investments derived from certificates of deposit and bank
deposits with U.S. banks, which are "other interest-bearing
obligations of * * * domestic corporations" within the meaning of
section 861(a)(1). Accordingly, we hold that the interest from
the U.S. pooled investments is treated as income from sources
within the United States. Sec. 861(a)(1).
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