- 48 -
No netting Total U.S. source Foreign source
Gross income
Operating income $1,300,000 $800,000 $500,000
Interest income 200,000 -0- 200,000
Total 1,500,000 800,000 700,000
Gross income ratio 100% 53.33% 46.67%
Expenses
Operating expenses 500,000 300,000 200,000
Interest expense 375,000 200,000 175,000
Total 875,000 500,000 375,000
Taxable income 625,000 300,000 325,000
Sec. 904(a) ratio 100% 48% 52%
If interest expense and interest income are netted,
however, the ratio is reduced to 37.23 percent. Thus, even
though the taxpayer received all of his interest income
from foreign sources under the regulations dealing with
interest income, sec. 1.861-2, Income Tax Regs., netting
disregards the source of the interest income that is
absorbed by interest expenses and causes the taxpayer to
obtain the same foreign tax credit as another taxpayer who
realized interest income entirely from U.S. sources. This
example demonstrates that the netting of interest expense
and interest income which petitioner argues arises from
section 1.861-8(e)(2)(i), Income Tax Regs., fails to take
into account the source of the interest income, and it
causes interest income from entirely different sources to
be treated the same.
Page: Previous 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 NextLast modified: May 25, 2011