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the subject regulation which is based upon the fungibility
of money approach, and, absent an express rule to the
contrary, the term "interest" should be recognized to mean
net interest expense; i.e., gross interest expense less
interest income.
Petitioner asserts that the following "simplified
example", demonstrates that recognizing "interest" or "the
cost of borrowing" as net interest expense, implements the
fungibility of money principle:
Assume * * * that a business needs $800,000,
and has $1 million in short-term instruments
bearing interest at 10 percent per year, and the
capacity to borrow funds with no fees and at 10
percent per year. The business can obtain the
$800,000 by reducing its holding of short-term
interest bearing instruments or by borrowing.
Either choice has exactly the same effect on the
net income of the business. If the business
borrows, interest expense will increase by
$80,000 per year; if the business sells the
instruments, interest income will decrease by
$80,000 per year.
Petitioner argues that the two sources of funds in the
above example, incurring debt and selling short-term
interest bearing assets, are fungible and should be treated
as fungible under the source rules, as would take place by
recognizing interest as net interest expense. Petitioner
also argues that "a corollary to the fungibility of these
two sources of funds is the fact that reduced interest
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