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Rather than creating a new method of cost allocation within
the DISC provisions, Congress intended that taxpayers use the
method for allocating costs under section 1.861-8, Income Tax
Regs. The intended method for allocating expenses in the CTI
computations appears consistent throughout the legislative
history of the DISC provisions, which states:
the combined taxable income from the sale of the export
property is to be determined generally in accordance
with the principles applicable under section 861 for
determining the source (within or without the United
States) of the income of a single entity with
operations in more than one country. These rules
generally allocate to each item of gross income all
expenses directly related thereto, and then apportion
other expenses among all items of gross income on a
ratable basis. * * * [Emphasis added.]
H. Rept. 92-533, supra at 74, 1972-1 C.B. at 538; accord S. Rept.
92-437, supra at 107, 1972-1 C.B. at 619. Consistent with
legislative history, the regulations provide that taxpayers must
allocate and apportion their costs (other than costs of goods
sold) "in a manner consistent with the rules set forth in �
1.861-8." Sec. 1.994-1(c)(6)(iii), Income Tax Regs.; see sec.
1.925(a)-1T(c)(6)(iii)(D), Temporary Income Tax Regs., supra.
In general, section 1.861-8, Income Tax Regs., provides
geographic sourcing rules to allocate and apportion expenses
between the United States and foreign countries. It also
provides rules for determining taxable income from specific
activities and for allocating income and deductions to those
activities under other sections of the Code referred to as
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