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groupings according to asset values.5 Petitioner apportioned all
of AG's assets to the statutory grouping, because they all
normally produce subpart F income. It apportioned none of AG's
loan assets to the residual grouping, because, although they
sometimes produce non-subpart F income (in this case, foreign
exchange gain), it is impossible to predict whether there will be
gain or loss, based on the nature of foreign exchange rates.
According to petitioner, the loan assets do not normally produce
such gain. Petitioner thus allocated the entire interest
deduction, in the amount of $1,498,562, to gross subpart F
income.
Respondent disagrees with petitioner's application of the
asset method. While she agrees that the non-loan assets should
all be apportioned to the subpart F grouping, she reasons that
the loan assets should be apportioned in some manner between the
statutory and residual groupings, because they actually produced
both subpart F and non-subpart F income. Respondent applies the
asset method by: (1) apportioning the non-loan assets all to the
5 The asset values are determined by an average of the asset
values at the beginning and the end of the year, unless this
method produces a "substantial distortion" of the asset values.
Sec. 1.861-8(e)(2)(v), Income Tax Regs. Petitioner has computed
an average value for AG's assets based on monthly averages, which
differs by 0.6 percent from respondent's computation that follows
the exact wording of the regulations. We find that 0.6 percent
is not a substantial distortion, and thus find respondent's
computation of AG's average asset values, which we set forth
above, to be correct.
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