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(i) Subject to subdivisions (ii) through (v) of
this subparagraph, the taxpayer's method of accounting
used in computing taxable income will be accepted for
purposes of determining amounts and the taxable year
for which items of income and expense (including
depreciation) are taken into account. * * *
(ii) Costs of goods sold shall be determined in
accordance with the provisions of section 1.61-3
[Income Tax Regs.]. See sections 471 and 472 and the
regulations thereunder with respect to inventories.
* * *
(iii) Costs (other than cost of goods sold) which
shall be treated as relating to gross receipts from
sales of export property are (a) the expenses, losses,
and other 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.].
See sec. 1.925(a)-1T(c)(6)(iii), Temporary Income Tax Regs., 52
Fed. Reg. 6446 (Mar. 3, 1987).
3. Application of Regulations by the Parties
Petitioners contend that subdivision (i) of the regulation
requires the computation of CTI in accordance with the method
they use to account for domestic taxable income. Section 1.451-
3(d)(5)(iii), Income Tax Regs., permits a variation from the
completed contract method for electing taxpayers to currently
deduct period costs even though the related income is not
reportable until a later taxable year when the contract is
completed. Due to their election to currently deduct period
costs, petitioners argue that, in the year of contract
completion, they should not be required to reduce foreign gross
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