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petitioner's interest expense allocable to ECI equaled all of its
interest, including the amounts paid to third-party banks and the
amounts accrued in connection with the advances from related
parties.
After respondent began the audit and raised the excess
interest tax issue, petitioner, in an attempt to eliminate any
excess interest tax liability, filed amended returns attempting
to elect to reduce its liabilities under section 1.884-1(e)(3),
Income Tax Regs. In this regard, respondent points out that a
foreign corporation may elect to reduce its U.S. liabilities by
an amount that does not exceed the excess of U.S.-connected
liabilities (determined under section 1.882-5, Income Tax Regs.)
over the liabilities "shown on the books of the U.S. trade or
business" (determined under either sec. 1.882-5(b)(3)(i) or
(ii)). Respondent concedes that prior to the 1996 amendment,
generally, section 1.882-5, Income Tax Regs., does not define
with particularity the meaning of U.S.-connected liabilities that
are "shown on the books".
With this background, respondent argues that petitioner's
attempted election has no effect because the liabilities shown on
the books of its U.S. trade or business equaled its U.S.-
connected liabilities. In other words, respondent contends that
petitioner must have some liabilities that were not shown on the
books of a U.S. trade or business in order to make the election,
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