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1.861-8(e)(2)(vi), Income Tax Regs., for tax year 1986.
As mentioned above, petitioner had used one of the
optional gross income methods described by section 1.861-
8(e)(2)(vi), Income Tax Regs., in apportioning interest
expenses on each of the subject returns. Respondent
concedes that petitioner is entitled to make this change,
as long as all members joining the 1986 return use one of
the optional gross income methods described by section
1.861-8(e)(2)(vi), Income Tax Regs.
The second change sought by petitioner, the change
at the heart of the instant controversy, involves
petitioner's assertion that each member's interest expense
to be allocated and apportioned under section 1.861-
8(e)(2), Income Tax Regs., for purposes of computing the
overall limitation under section 904(a), is "net interest
expense", i.e., interest expense for the year less interest
income but not less than zero, rather than gross interest
expense. Respondent asserts that this change is improper.
To quantify petitioner's position, the following
schedule sets forth the interest expense incurred by each
member of petitioner's affiliated group of corporations,
the interest income earned by that member, and the net
interest expense of that member; i.e., interest expense
less interest income but not less than zero:
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