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corporation during the taxable year. Sec. 1366(f)(2).5 Thus,
the loss arising from the section 1374 tax is a subchapter S item
under section 301.6245-1T(a)(1)(i), Temporary Proced. & Admin.
Regs., supra.
Petitioner’s contention that the regulation is illogical
fails to meet the Chevron standard under which we invalidate a
regulation if it is arbitrary, capricious, or contrary to the
statute. See also United States v. Mead Corp., 533 U.S. ___,
___, 121 S. Ct. 2164, 2171 (2001) (“administrative implementation
of a particular statutory provision qualifies for Chevron
deference when it appears that Congress delegated authority to
the agency generally to make rules carrying the force of law, and
that the agency interpretation claiming deference was promulgated
in the exercise of that authority”). We reject petitioner’s
contention that section 301.6245-1T(a)(1)(vi)(G), Temporary
Proced. & Admin. Regs., supra, is arbitrary, capricious, or
manifestly contrary to section 6245.
F. Conclusion
Under section 6245, as already noted, the unified audit and
5 Sec. 1366(f)(2) provides as follows:
(2) Treatment of tax imposed on built-in gains.–
If any tax is imposed under section 1374 for any
taxable year on an S corporation, for purposes of
subsection (a), the amount so imposed shall be treated
as a loss sustained by the S corporation during such
taxable year. The character of such loss shall be
determined by allocating the loss proportionately among
the recognized built-in gains giving rise to such tax.
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