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the hands of the taxpayer." Sec. 1.861-8(e)(7)(i), Income Tax
Regs. In "the unusual circumstances" where apportionment is
necessary, it is done "in the same proportion that the amount of
gross income within such statutory grouping * * * and such
residual grouping bear, respectively, to the total amount of
gross income within the class of gross income." Sec. 1.861-
8(e)(7)(ii), Income Tax Regs.
To summarize, deductions are first allocated then
apportioned based on a factual relationship between the income
and the deduction. If the deduction is one for interest, it is
allocated and apportioned among the groupings of income according
to asset values of the income producing activities and
properties. If the deduction is one for loss on the disposition
of property, it is allocated based on the income ordinarily
produced by that property, and further apportioned, if necessary,
according to gross income. Finally, if the deduction relates to
no specific item of gross income, it is allocated ratably across
all income.
Discussion
Interest Expense
Following the instruction of section 1.861-8(e)(2)(ii),
Income Tax Regs., the parties applied the asset method to
apportion the deduction between the statutory and residual
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