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"asset method", the deduction for interest is apportioned,
generally, in accordance with the value (book value or fair
market value) of the assets utilized or invested in the
activity or property. See sec. 1.861-8(e)(2)(v), Income
Tax Regs. This is the method that petitioner wishes to use
for tax years 1982, 1983, and 1984, as mentioned above.
Under the "optional gross income methods", the deduction
for interest is apportioned, generally, on the basis of the
gross income in the statutory grouping or groupings and in
the residual grouping. Sec. 1.861-8(e)(2)(vi), Income Tax
Regs. This is the method that petitioner wishes to use for
tax year 1986, as mentioned above.
Significantly, the regulations provide an exception
that applies in the case of interest incurred specifically
to purchase specific property. See sec. 1.861-8(e)(2)
(iv), Income Tax Regs. In that case, the interest is
treated as definitely related to the gross income derived
from the property and is apportioned accordingly. See id.
In order for this exception to apply, certain facts and
circumstances enumerated in the regulations must be found.
These include the fact that the indebtedness was incurred
to purchase the specific property, the fact that the
proceeds of the loan were actually applied to that purpose,
the fact that the property is the only security for the
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