Taiyo Hawaii Company, Ltd. - Page 32

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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                
               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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