- 49 -
deductions definitely related, and therefore allocated
and apportioned, thereto, and (b) a ratable part of any
other expenses, losses, or other deductions which are
not definitely related to a class of gross income,
determined in a manner consistent with the rules set
forth in * * * [section] 1.861-8, [Income Tax Regs.].
[Sec. 1.994-1(c)(6)(iii), Income Tax Regs.]
Interest is among the expenses subject to apportionment under the
rules set forth in section 1.861-8, Income Tax Regs. Sec. 1.861-
8(e)(2), Income Tax Regs. The regulation apportions interest
“based on the approach that money is fungible and that interest
expense is attributable to all activities and property regardless
of any specific purpose for incurring an obligation on which
interest is paid.” Id. Although the pertinent provisions of
section 1.861-8(e)(2), Income Tax Regs., do not specifically
provide that the interest expense subject to apportionment is the
taxpayer’s interest expense net of interest income, rather than
gross interest expense, we concluded in Bowater, Inc. v.
Commissioner, 101 T.C. 207 (1993), that a taxpayer’s net interest
expense was the appropriate interest expense to be apportioned.
We reasoned that the interest expense net of interest income
represents a taxpayer’s actual cost of borrowing and noted that
interest is assumed to be fungible for purposes of the
regulation. Id. at 211, 214-215. Accordingly, we held that, for
purposes of the 50 percent of CTI method, a taxpayer may
apportion a ratable part of net, rather than gross, interest
expense to its qualified export receipts in calculating CTI. Id.
at 214-215.
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