Trinova Corporation and Subsidiaries - Page 16

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               Interest expense is allocated under the regulations to all             
          gross income that the property or activity "could reasonably have           
          been expected to generate."  Sec. 1.861-8(e)(2)(ii), Income Tax             
          Regs.  Even if not predictable with precision, exchange gains               
          were certainly a reasonable possibility.  Furthermore, the                  
          regulations specifically contemplate a situation where there will           
          be a deduction even with no corresponding income.7                          
               Next, although exchange gain has traditionally been treated            
          separately from the underlying income from the transaction,                 
          Philip Morris Inc. v. Commissioner, 104 T.C. 61, 66 (1995), affd.           
          71 F.3d 1040 (2d Cir. 1995), we do not see how such separate                
          treatment undermines the validity of respondent's approach.  In             
          prorating the assets across two groupings of income, respondent             
          is not challenging the separateness of the income, but is merely            
          attempting a reasonable allocation of interest expense to that              
          income.                                                                     
               Furthermore, while the regulations are silent on this                  
          particular point, they do provide a foundation for respondent's             
          approach.  When a single item of deduction is attributable to two           
          different sources, it must be prorated between them.  See supra             
          note 4.  When a piece of property produces income attributable to           
          two different sources, the loss on the sale of that property can            

          7  "Each deduction * * * shall be allocated * * * even though,              
          for the taxable year, no gross income in such class is received             
          or accrued".  Sec. 1.861-8(d)(1), Income Tax Regs.                          




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