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in section 1.861-8(e)(2)(i), Income Tax Regs., simply to
explain why the rules specifically dealing with interest
expenses allocate interest expenses to all of the
taxpayer's gross income, whereas the rules of general
applicability treat other deductions as related to one
or more classes of income.
In order to facilitate our discussion of the
positions of the parties, it is helpful to review the
following example. Assume that during the year a taxpayer,
a domestic corporation, had gross operating income from
domestic sales of $800,000, gross operating income from
foreign sales of $500,000, operating expenses of $300,000
attributable to domestic sales, and operating expenses of
$200,000 attributable to foreign sales. Assume further
that, during the same year, the taxpayer realized interest
income from U.S. sources of $200,000 and interest expense
of $375,000. Finally, assume that the ratio of the value
of the assets which relate to activities and properties
that generate foreign source income to the value of all
of the taxpayer's assets is the same as the ratio of the
taxpayer's gross income from foreign sources to total gross
income. Based upon these facts, the computation of the
taxpayer's taxable income from U.S. and foreign sources,
assuming that netting is not permitted, and the proportion
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