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citing section 1.884-1(e)(3)(ii), Income Tax Regs. We agree with
respondent that petitioner has not shown the requisite
circumstances for a liability reduction as required by section
1.884-1(e)(3)(ii), Income Tax Regs.
Now, we consider petitioner's argument that the Ginter and
Gomes properties should not be included in the step 1 asset
category. If petitioner is correct that the two properties do
not belong in the step 1 category, the amount of petitioner's
liabilities subjected to the excess interest provisions and the
amount of the excess interest tax would be reduced.
The question we must decide is whether unimproved real
property which is not currently being developed is a step 1
asset. To be included in "step 1", the asset must produce or be
able to produce ECI with the conduct of a U.S. trade or business.
Sec. 1.882-5(b)(1), Income Tax Regs. Section 864(c) governs the
determination of whether an asset generates ECI. If a foreign
corporation is engaged in a U.S. trade or business, income from
U.S. sources is generally placed into one or the other of two
categories pursuant to section 864(c)(2) and (3) to determine
whether the income is effectively connected with a U.S. trade or
business. Section 864(c)(2) applies to fixed or determinable
annual or periodic income and to gains from the sale of capital
assets. To determine whether such gain or income is ECI, section
864(c)(2) provides two tests: (1) Whether the income is derived
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