Trinova Corporation and Subsidiaries - Page 1

                                 T.C. Memo. 1997-100                                  

                               UNITED STATES TAX COURT                                

                 TRINOVA CORPORATION AND SUBSIDIARIES, Petitioner v.                  
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 2931-94.             Filed February 27, 1997.               

                    P, a corporation, filed a consolidated tax return                 
               with its affiliated companies, including AG, a                         
               controlled foreign corporation for purposes of sec.                    
               957(a), I.R.C.  In 1986, AG had gross income from                      
               royalties, interest, and exchange gains.  R stipulated                 
               that the exchange gains constituted non-subpart F                      
               income to P.  In order to compute the amount of P's net                
               subpart F income, P and R both allocated AG's                          
               deductions for interest expense, swap losses, and Swiss                
               capital tax against AG's income using the asset method                 
               of sec. 1.861-8(e)(2)(v), Income Tax Regs.  R used the                 
               asset method by prorating AG's assets between the                      
               subpart F and non-subpart F groupings based on the                     
               gross income in those categories produced by the                       
               assets.  P apportioned assets according to the income                  
               they normally produced, and apportioned all assets and                 
               all deductions to subpart F income.  R apportioned                     
               deductions for exchange losses ratably across all gross                

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