Sunoco, Inc. and Subsidiaries - Page 45




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             With netting            Total     U.S. source  Foreign source            
             Gross income                                                             
             Operating income     $1,300,000   $800,000     $500,000                  
             Interest income      -0-           -0-            -0-                    
             Total                1,300,000    800,000      500,000                   
             Gross income ratio   100%         61.54%       38.46%                    
             Expenses                                                                 
             Operating expenses   500,000      300,000      200,000                   
             Interest expense        175,000     107,692       67,308                 
             Total                675,000      407,692      267,308                   
             Taxable income       625,000      392,308      232,692                   
             Sec. 904(a) ratio    100%         62.7692%     37.2308%                  

             Thus, in this example, the netting of interest expense and               
             interest income has the effect of increasing, from 28                    
             percent to 37.23 percent, the proportion of the taxpayer's               
             taxable income, $625,000, that is attributable to foreign                
             sources.                                                                 
                  There are several consequences of netting that should               
             be noted.  First, in order for the netting computation to                
             arrive at the taxpayer's correct taxable income, i.e.,                   
             $625,000 in the above example, the taxpayer's total gross                
             income must be reduced by the amount of interest income                  
             that is offset against interest expense.  This adjustment                
             is necessary because only net interest expense is allocated              
             and apportioned to the statutory grouping (i.e., foreign                 
             source) and the residual grouping (i.e., United States                   
             source) under section 1.861-8(e)(2), Income Tax Regs.                    
             Accordingly, the aggregate deductions used in the netting                
             computation are less than actual aggregate deductions.                   






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