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the interest from the U.S. pooled investments is interest on
"deposits with persons carrying on the banking business" within
the meaning of section 871(i)(2)(A) and (3)(A). Consequently, no
tax is imposed on the interest from the U.S. pooled investments
paid by LTD to its clients. Secs. 871(i)(1), 881(d).
Additionally, no tax is required to be deducted and withheld
pursuant to section 1441(a) from any amount described in section
871(i)(2). Secs. 1441(c)(10), 1442(a).
As to the non-U.S. certificates of deposit and term
deposits, we have concluded, supra p. 180, that the interest from
such investments is treated as income from sources without the
United States. Interest that is treated as income from sources
without the United States is not subject to tax pursuant to
either section 871(a) or section 881(a). Additionally, interest
that is treated as income from sources without the United States
is not subject to withholding tax pursuant to either section
1.1441-1, Income Tax Regs., or, therefore, section 1.1442-1,
Income Tax Regs. Sec. 1.1441-3(a), Income Tax Regs.
Consequently, we hold that neither LTD nor INC is a withholding
agent liable for withholding tax with respect to the interest
paid on pooled investments during the post-1986 Act years.
5. Discussion of Dividend Income
Petitioners contend that they have shown that none of LTD's
worldwide gross income was effectively connected and that,
because less than 50 percent of LTD's worldwide gross income was
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