- 46 -
Thus, taxpayer's taxable income, i.e., the difference
between the gross income in both groupings and the
aggregate expenses allocated and apportioned thereto, will
be overstated, unless the taxpayer's total gross income is
reduced by the amount of interest income that was offset.
Continuing the above example, if interest expense and
interest income are netted for purposes of allocating
interest expenses but the amount of interest income offset
by netting is not removed from the taxpayer's gross income,
then the computation contemplated by section 904(a) would
be as follows:
With 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 175,000 116,667 58,333
Total 675,000 416,667 258,333
Taxable income 825,000 583,333 241,667
Sec. 904(a) ratio 1132% 193.3333% 138.6667%
1 Based upon taxable income of $625,000.
Thus, as illustrated above, if the taxpayer's gross income
is not reduced, then the taxpayer's taxable income,
$625,000, would be overstated by the amount of the interest
income that is offset by interest expense, $200,000, and
the section 904(a) ratio would not be based upon the
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