Taiyo Hawaii Company, Ltd. - Page 29

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               Are the Ginter and Gomes Properties To Be Included in the              
          Computation of the Excess Interest Tax?--Next, petitioner                   
          contends that the related-party debt and resulting interest                 
          connected with the Ginter and Gomes properties should not be                
          included in the base used to compute the excess interest tax.               
          Petitioner's argument concerns the computation of the excess                
          interest tax provided by section 884(f)(1)(B).  Under those                 
          provisions, excess interest is computed by subtracting interest             
          paid by the U.S. branch (branch interest) from the amount of                
          interest allocable to ECI under section 1.882-5, Income Tax Regs.           
          Section 1.882-5, Income Tax Regs., provides a three-step process            
          for determining the amount of interest allocable to ECI.  The               
          first step determines which assets are U.S. connected by                    
          ascertaining which assets generate ECI from the conduct of a                
          trade or business in the United States.  Sec. 1.882-5(b)(1),                

          situated domestic corporation.  In addition, petitioner contends            
          that sec. 1.884-1(e)(3), Income Tax Regs., violates the                     
          nondiscrimination clause.  Petitioner has not made any specific             
          arguments showing any particular discrimination.  For example,              
          petitioner has not shown or argued that there was no income                 
          against which "excess interest" could be applied or that the tax            
          on excess interest exceeds petitioner's potential tax benefit               
          from ECI.  Petitioner, using the discrimination argument as a               
          stalking horse, contends that by providing a taxpayer with the              
          ability to reduce its U.S.-connected liabilities under sec.                 
          1.884-1(e)(3), Income Tax Regs., without any limitation, there              
          would be no conflict with the nondiscrimination clause herein.              
          In general terms, petitioner's loosely formulated discrimination            
          argument is contrary to the purposes underlying sec. 884 and                
          without specificity or support.                                             

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Last modified: May 25, 2011