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gross income based on the ratio of gross income from each class
to the taxpayer's total gross income. Sec. 1.861-8(a)(2),
(b)(1), and (c)(3), Income Tax Regs. A cost is "definitely
related" to a class of gross income if it is incurred as a result
of, or incident to, an activity or in connection with property
from which that class of gross income is derived. Sec. 1.861-
8(b)(2), Income Tax Regs. In general, period costs benefit and
relate to the taxpayer's business as a whole and are not incident
to or necessary for the performance of a particular contract.
McMaster v. Commissioner, 69 T.C. 952, 955 (1978). Thus, period
costs are costs that do not definitely relate to any class of
gross income, as defined by sections 1.994-1(c)(6)(iii) and
1.861-8, Income Tax Regs., and must be ratably apportioned to all
gross income.
Additionally, section 1.861-8, Income Tax Regs., does not
distinguish period costs from other costs that relate to export
sales. Furthermore, section 1.861-8, Income Tax Regs., does not
excuse taxpayers from allocating costs to a class of gross income
unless the costs are definitely related to another class of gross
income. Section 1.861-8(a)(2), Income Tax Regs., provides:
“Except for deductions, if any, which are not definitely related
to gross income * * * and which, therefore, are ratably
apportioned to all gross income, all deductions of the taxpayer
* * * must be so allocated and apportioned.” Thus, consistent
with the section 994 regulations, section 1.861-8, Income Tax
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