Trinova Corporation and Subsidiaries - Page 2

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               income, relying on sec. 1.861-8(e)(7)(ii), Income Tax                  
               Regs.  P apportioned those deductions in the same                      
               manner as the underlying expenses.  Held: (1) Interest                 
               expense is apportioned under the asset method by                       
               prorating the assets between the statutory and residual                
               groupings based on the income they produce; (2) swap                   
               losses are apportioned in the same manner as interest                  
               expense; (3) Swiss capital tax is apportioned in the                   
               same manner as interest expense; (4) sec. 1.861-                       
               8(e)(2)(v), Income Tax Regs., does not apply to the                    
               exchange losses involved in this case, and the                         
               deductions are apportioned in the same manner as the                   
               underlying expenses to which they relate.                              


               Frederick E. Henry, Jeffrey M. O'Donnell, and Julie C. H.              
          Walsh, for petitioner.                                                      
               Nancy B. Herbert and Reid M. Huey, for respondent.                     



                                 MEMORANDUM OPINION                                   
               TANNENWALD, Judge: Respondent determined the following                 
          deficiencies in petitioner's Federal income taxes and additions             
          to tax:                                                                     
                                                  Additions to Tax                    
               Year          Deficiency           Sec. 6661(a)                        
               1985      $   117,988.00                --                             
               1986      11,630,928.00            $1,429,687.00                       
               1987      4,924,255.00                  --                             
               1988      834,875.00                    --                             
          After concessions by the parties, the issue for decision is how             
          various deductions should be allocated and apportioned between              
          the subpart F income and non-subpart F income of petitioner's               
          wholly owned subsidiary for the purposes of determining                     




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