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agreements, AG agreed to pay interest in one currency at a
certain rate on a specific principal amount in that currency. In
return, AG would receive interest payments in another currency
based on a certain interest rate on a specific principal amount
in that currency.
The total currency exchange loss consisted of the following
items:
Amount in
Item U.S. Dollars
Accrual of DM swap payments $411,151
Accrual of � swap payments (10,968)
Accrual of income tax 246,033
Accrual of interest payments 73,528
Other - error 920
Total currency exchange loss 720,664
Both petitioner and respondent allocated the deductions for
interest expense, Swiss capital tax, and swap losses using the
asset method set forth in section 1.861-8(e)(2)(v), Income Tax
Regs. Petitioner allocated these three deductions solely against
subpart F income. Petitioner treated the items constituting
exchange losses individually, allocating exchange losses
attributable to accrual of payments under the swap agreements and
to accrual of interest payments solely against subpart F income,
and allocating "accrual of income tax" and "other" items ratably
across all gross income.
Respondent allocated and apportioned the deductions for
interest expense, swap losses, and Swiss capital tax using the
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