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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.
_____________________
4 For example, an interest deduction that is disallowed
under section 265 [relating to expenses and interest
relating to tax-exempt income] or 291 [relating to
special rules relating to corporate preference items]
should not be allowed, capitalized, or suspended under
another provision. [H. Conf. Rept. 99-841, at II-146,
supra, 1986-3 C.B. (Vol. 4), at 146.]
(6) 1986 Blue Book
On May 4, 1987, the staff of the Joint Committee on Taxation
published its General Explanation of the Tax Reform Act of 1986
(1986 Blue Book), which states in pertinent part as follows (pp.
262-264, 266):
C. Interest Deduction Limitations (Sec. 511 of the Act and
secs. 163(d) and (h) of the Code)55
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