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proportion to the amount of gross income in each grouping,
see sec. 1.861-8(e)(2)(iii), Income Tax Regs.
Petitioner argues that, under the version of the
section 861 regulations in effect during the years in
issue, it "may allocate and apportion net interest, rather
than gross, interest expense" in calculating taxable income
from sources without the United states for purposes of
section 904(a). Petitioner's position is based on its
reading of section 1.861-8(e)(2)(i), Income Tax Regs.,
which is quoted above. Petitioner emphasizes that section
1.861-8(e)(2)(i), Income Tax Regs., states, in general,
that the method of allocation and apportionment for
interest is based on the approach that "money is fungible",
and 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." Id. Petitioner notes
that the regulation refers to "interest" as "the cost of
borrowing" in the context of "the fungibility of money".
Based thereon, petitioner argues that the language of the
regulation "raises a contextual ambiguity with respect to
the precise definition of 'interest' and 'the cost of
borrowing'." According to petitioner, the term "interest"
can mean either net interest or gross interest, depending
on the context. Petitioner argues that, in the context of
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