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provisions define "gross income from sources within the
United States" and "gross income from sources without the
United States" to include all of the interest income earned
by the taxpayer during the taxable year. Secs. 1.861-2(a),
1.862-1(a), Income Tax Regs. In computing gross income
from sources within and without the United States, neither
the statute nor the regulations contemplate that the
portion of the taxpayer's gross income consisting of
interest income for the year will be reduced or entirely
offset by interest expenses.
As shown in the hypothetical example discussed above,
such a reduction of the amount of the taxpayer's gross
income would be necessary in a netting computation.
Otherwise, the computation would overstate the taxpayer's
taxable income for the year by the interest income that
is offset by interest expense. The adjustment to gross
income that would be necessary is depicted in the
computation set forth in the hypothetical discussed above.
It is similar to the adjustment that the parties made in
computing the taxpayer's interest expense for 1986 as shown
in the appendix.
Moreover, petitioner's position that it is entitled to
allocate net interest expense under section 1.861-8(e)(2),
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