- 44 -
of each to the taxpayer's entire taxable income, as
contemplated by section 904(a), are shown in the following
schedule:
No netting Total U.S. source Foreign source
Gross income
Operating income $1,300,000 $800,000 $500,000
Interest income 200,000 200,000 -0-
Total 1,500,000 1,000,000 500,000
Gross income ratio 100% 66.67% 33.33%
Expenses
Operating expenses 500,000 300,000 200,000
Interest expense 375,000 250,000 125,000
Total 875,000 550,000 325,000
Taxable income 625,000 450,000 175,000
Section 904(a) ratio 100% 72% 28%
Petitioner's position, is that section 1.861-8(e)(2)
(i), Income Tax Regs., permits a taxpayer to offset
interest expense with interest income before "net interest
expense" is allocated and apportioned under section 1.861-
8(e)(2), Income Tax Regs., to the different groupings of
gross income for purposes of computing the taxpayer's
taxable income in each grouping. Based on petitioner's
position, the computation of the taxpayer's taxable income
from U.S. and foreign sources, and the proportion of each
to the taxpayer's entire taxable income as contemplated by
section 904(a), are shown in the following schedule:
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