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each grouping. See sec. 1.861-8(b)(5), (c)(2), Income
Tax Regs.
Thus, under the rules of general applicability, the
approach of the regulations, with several exceptions, is
that every deduction has a definite factual relationship to
a particular class of gross income which constitutes less
than all of the taxpayer's gross income. Based upon that
approach, the rules of general applicability require each
deduction to be allocated to the related class of gross
income and to be apportioned, on some reasonable basis, to
the statutory and residual groupings of gross income.
The regulations take a different approach in the
specific rules governing the allocation and apportionment
of interest expenses, set forth in section 1.861-8(e)(2),
Income Tax Regs. The regulations describe this approach
as follows:
(2) Interest–-(i) In general. The method
of allocation and apportionment for interest set
forth in this paragraph (e)(2) is based on the
approach that money is fungible and that interest
expense is attributable to all activities and
property regardless of any specific purposes for
incurring an obligation on which interest is
paid. This approach recognizes that all
activities and property require funds and that
management has a great deal of flexibility as to
the source and use of funds. Normally, creditors
of a taxpayer subject the money advanced to the
taxpayer to the risk of the taxpayer's entire
activities and look to the general credit of the
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