Allocation of deductions
(A) Allocation of deductions. In allocating deductions that are definitely related to one or more classes of gross income, exempt income (as defined in paragraph (d)(2)(ii) of this section) shall be taken into account. (B) Apportionment of deductions. In apportioning deductions that are definitely related either to a class of gross income consisting of multiple groupings of income (whether statutory or residual) or to all gross income, exempt income and exempt assets (as defined in paragraph (d)(2)(ii) of this section) shall not be taken into account. (ii) Exempt income and exempt asset defined(A) In general. For further guidance, see 1.861-8(d)(2)(ii)(A). (B) Certain stock and dividends. For further guidance, see 1.861-8(d)(2)(ii)(B). (C) Foreign-derived intangible income and inclusions under section 951A(a). For further guidance, see 1.861-8(d)(2)(ii)(C). (iii) Income that is not considered tax exempt. The following items are not considered to be exempt, eliminated, or excluded income and, thus, may have expenses, losses, or other deductions allocated and apportioned to them: (A) In the case of a foreign taxpayer (including a foreign sales corporation (FSC)) computing its effectively connected income, gross income (whether domestic or foreign source) which is not effectively connected to the conduct of a United States trade or business; (B) In computing the combined taxable income of a DISC or FSC and its related supplier, the gross income of a DISC or a FSC; and (C) For further guidance, see 1.861-8(d)(2)(iii)(C) through (E). (D)-(E) [Reserved] (iv) Value of stock attributable to previously taxed earnings and profits. For further guidance, see 1.861-8(d)(2)(iv).