1. Lizard Corp., a U.S. corporation, reports $250,000 interest expense for the tax year. None of the interest relates to nonrecourse debt or loans from affiliated corporations. Lizards U.S. and foreign assets are reported as follows.

Fair market value:
U.S. assets	$ 5,000,000
Foreign assets	$10,000,000
Tax book value:
U.S. assets	$ 2,000,000
Foreign assets	$ 6,000,000

How should Lizard assign its interest expense between U.S. and foreign sources to maximize its FTC for the current year? Choose the best answer, then explain any calculations.

1. Using tax book values.
2. Using fair market values.
3. Using tax book value for U.S. source and fair market value for foreign source.
4. Using fair market value for U.S. source and tax book value for foreign source.