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interpreted as a directive from Congress to apply the section
1.861-8, Income Tax Regs., expense allocation and apportionment
regime in performing CTI computations.
The principles under section 1.861-8, Income Tax Regs.,
require that all deductions must be allocated to the class or
classes of gross income to which they are factually related.
Deductions are incurred with respect to activities and properties
that generate particular classes of gross income, or which
generate all classes of gross income, and that are definitely
related to those classes of gross income.
These principles, according to respondent, require that
deductions be apportioned between gross income derived from the
possession product (the statutory grouping) and other gross
income (the residual grouping) using a method that reasonably
reflects the factual relationship between the deductions and the
income assigned to the grouping. Respondent contends that
section 936(h)(5)(C)(ii)(II) adopts a method of apportioning
expenses to possession product gross income which turns upon
factual relationships. Petitioner's alleged misapplication of
the PCR causes gross misapportionments, according to respondent.
Petitioner argues that the plain meaning of Q&A-12 is
consistent with the language and purpose of section
936(h)(5)(C)(ii)(II). Petitioner contends that section
936(h)(5)(C)(ii)(II) provides only general principles for
component products and does not provide specific guidance for
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