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step in determining taxable income from a specific source
or activity is to allocate and apportion the taxpayer's
"expenses, losses, and other deductions" to each of the
groupings of gross income. Sec. 1.861-8(a)(2), (b), and
(c), Income Tax Regs. Taxable income from a particular
source or activity is the difference between the aggregate
items of gross income in that grouping and the sum of the
expenses, losses, and other deductions that are properly
allocated and apportioned thereto, and a ratable portion
of any expenses, losses, or other deductions that cannot
definitely be allocated to an item or class of gross
income. See secs. 861(b), 862(b); secs. 1.861-1, 1.861-
8(a)(1), Income Tax Regs.
The regulations provide rules of general applicability
governing the allocation and apportionment of expenses,
losses, and other deductions, see sec. 1.861-8(a), (b),
(c), and (d), Income Tax Regs., as well as rules governing
the allocation and apportionment of specific deductions,
see sec. 1.861-8(e)(2) through (11), Income Tax Regs.
Specific rules for the allocation and apportionment of
interest expense are provided in section 1.861-8(e), Income
Tax Regs.
The principal rule of general applicability is that a
taxpayer's expenses, losses, and other deductions are to be
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