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latter term is not used in the statute but is contained in the
implementing regulations, specifically sec. 1.861-8, Income Tax
Regs.
Section 1.861-8(a)(2), Income Tax Regs., requires the
taxpayer to allocate deductions to a class of gross income and,
if necessary, to apportion deductions within the class of gross
income between the “statutory grouping” (foreign source income)
and the “residual grouping” (U.S. source income). See sec.
1.861-8(a)(4), (f)(1), Income Tax Regs. The classes of gross
income are listed in section 1.861-8(a)(3), Income Tax Regs., the
same income items as are listed in section 61. Allocations and
apportionments are made based on the factual relationship of the
deductions to the gross income except for deductions not
definitely related to specific gross income, like the standard
deduction, which is ratably apportioned across all gross income.
Sec. 1.861-8(a)(2), (4), Income Tax Regs.
The result is a determination of the taxpayer’s U.S. source
taxable income, and foreign source taxable income, the sum of
which taxable income is subject to U.S. income taxation. See
sec. 1. The distinction between U.S. source taxable income and
foreign source taxable income may, however, be important for
other reasons. See, e.g., secs. 901, 904 (the foreign tax
credit). The international aspect of U.S. income taxation is an
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Last modified: May 25, 2011