Exempt income expenses

[KWF]

A taxpayer incurs $150 expense specifically to produce $10,000 investment income, $5000 of which is taxable & $5000 which is tax exempt.

He also earns another $5000 investment income, all taxable, which is a separate investment and does not have any expense associated with it.

Is his deductible expense $75, or $100?

[taxea]

it is possible that the expense should be added to his basis.

[Roland Slugg]

Since the expense can be specifically identified with one account, that is the allocation method to use. Deduction = $75. See Regs 1.265-1(c)