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taxpayer's "entire taxable income for the same taxable
year". Sec. 904(a). This raises a question about where in
the regulations is there authority to reduce "gross income"
by the amount of netted interest.
Second, an equally important consequence of netting is
the fact that it increases the ratio under section 904(a),
and thus increases the amount of foreign tax credit, only
to the extent that the interest income that is absorbed by
interest expense in the netting process is from U.S.
sources. To the extent that a relatively greater amount of
the interest income absorbed in the netting process is from
foreign sources, then netting produces a lower ratio under
section 904(a) than not netting.
In the above example, we assumed that all of the
interest income, $200,000, was from U.S. sources. In that
case, the section 904(a) ratio computed without netting was
28 percent but was increased to 37.23 percent by netting.
On the other hand, if we assume that the interest income is
entirely from foreign sources, then the section 904(a)
ratio, without netting, is 52 percent, computed as follows:
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