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issue, respectively. Thus, the effect of netting would be
to substantially increase petitioner's income from sources
without the United States, the numerator of the limiting
fraction under section 904(a), and to substantially
increase the amount of petitioner's foreign tax credit for
each of the years in issue.
Both parties rely on the regulations promulgated under
the source rules, viz sections 861 through 864, especially
section 1.861-8(e)(2), Income Tax Regs., to support their
position that netting is permitted or that netting is not
permitted. Petitioner does not contend that the
regulations are contrary to the statute or unlawful in
any respect. Therefore, as presented by the parties, the
issue in this case is whether the netting of interest
income and interest expense is permitted by the regulations
promulgated under sections 861 through 864, principally
section 1.861-8(e)(2), Income Tax Regs., that were in
effect during the years 1982, 1983, 1983, and 1986,
generally referred to herein as the subject regulations.
At the outset, we note that the principal regulation
at issue in this case, section 1.861-8(e)(2), Income Tax
Regs., was adopted on January 3, 1977, effective for
taxable years beginning after December 31, 1976
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