- 44 -
purposes of sections 163(d), 163(h), and 469. Sec. 1.163-
8T(a)(1), Temporary Income Tax Regs., supra. Although the
Congress did not itself devise the allocation rules, the Congress
clearly stated how it expected the allocation rules to operate.
The Joint Statement of Managers portion of the conference
committee report dealing with section 469 states, in pertinent
part, as follows (H. Conf. Rept. 99-841 at II-146 (1986), 1986-3
C.B. (Vol. 4) at 146):
Expenses allocable to portfolio income.--The conference
agreement provides that portfolio income is reduced by the
deductible expenses (other than interest) that are clearly
and directly allocable to such income. Properly allocable
interest expense also reduces portfolio income. Such
deductions accordingly are not treated as attributable to a
passive activity.
The conferees anticipate that the Treasury will issue
regulations setting forth standards for appropriate
allocation of expenses and interest under the passive loss
rule. The conferees anticipate that regulations providing
guidance to taxpayers with respect to interest allocation
will be issued by December 31, 1986. These regulations
should be consistent with the purpose of the passive loss
rules to prevent sheltering of income from personal services
and portfolio income with passive losses. Moreover, the
regulations should attempt to avoid inconsistent allocation
of interest deductions under different Code provisions.4
In the case of entities, a proper method of
allocation may include, for example, allocation of
interest to portfolio income on the basis of assets,
although there may be situations in which tracing is
appropriate because of the integrated nature of the
transactions involved. Because of the difficulty of
recordkeeping that would be required were interest
expense of individuals allocated rather than traced, it
is anticipated that, in the case of individuals,
interest expense generally will be traced to the asset
or activity which is purchased or carried by incurring
or continuing the underlying indebtedness.
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