internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc dom corp 2-plr-123494-00 date date legend distributing controlled sub business a business b state x a b dear this is in response to your letter dated date requesting rulings on behalf of distributing with respect to a proposed and partly consummated transaction additional information was received in letters dated date date date date date and date the material information submitted is summarized below distributing is a publicly traded state x corporation engaged directly and through subsidiaries including sub a wholly owned first-tier subsidiary of distributing in business a and business b distributing is the common parent of an affiliated_group_of_corporations filing a consolidated_return on the basis of a fiscal_year ending september plr-123494-00 immediately prior to the distribution of the controlled stock as described below distributing will have outstanding approximately a shares of common_stock and b shares of preferred_stock each outstanding share of distributing common_stock also evidences one preferred share purchase right that is a right to purchase a fraction of a share of distributing preferred_stock upon the occurrence of certain specified triggering events financial information has been received indicating that business a and business b have each had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the last five fiscal years in order to allow management of each of business a and business b to focus solely on the opportunities and challenges specific to that business including the adoption of capital structures and resource allocation policies that reflect the financial and strategic characteristics of each business the following series of transactions is proposed distributing will form a subsidiary_corporation controlled sub which is engaged in both business a and business b will liquidate distributing all its assets to distributing the liquidation distributing will contribute its business b assets including the business b assets of sub and the stock of certain corporations engaged in business b to controlled the contribution distributing will distribute its controlled stock pro_rata to the distributing shareholders the distribution distributing has two issues of outstanding long-term debt the convertible notes in accordance with the terms of the convertible notes controlled will assume liability for these obligations and they will become convertible into controlled stock it is expected that each share of controlled stock will evidence one preferred share purchase right the terms of which are expected to be substantially the same as those of the distributing share purchase rights described above it is not anticipated that there will be any continuing transactions between distributing and controlled following the distribution other than possible transactions in the ordinary course of business or pursuant to certain short-term transitional agreements including a tax_sharing_agreement the following representations have been made in connection with the liquidation a distributing will on the date of adoption of the plan of complete_liquidation and at all times until the final distribution is completed be the plr-123494-00 owner of at least of the single outstanding class of the stock of sub no shares of sub stock will have been redeemed during the three years preceding the adoption of the plan of complete_liquidation of sub distributions from sub to distributing pursuant to the plan of complete_liquidation will be made within a single taxable_year of sub as soon as the first liquidating_distribution has been made sub will cease to be a going concern and its activities will be limited to winding up its affairs paying its debts and distributing its remaining assets to its shareholders sub will retain no assets following the final liquidating_distribution sub will not have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three years prior to the date of adoption of the plan_of_liquidation no assets of sub have been or will be disposed of by either distributing or sub except for dispositions in the ordinary course of business and dispositions occurring more than three years prior to adoption of the plan_of_liquidation except for business b assets held by sub including certain stock which following the liquidation will be contributed to controlled the liquidation of sub will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation of any of the businesses or assets of sub if persons holding directly or indirectly more than in value of the sub stock also hold directly or indirectly more than in value of the stock in the recipient corporation for purposes of this representation ownership will be determined immediately after the spin-off and by application of the constructive_ownership rules of sec_318 of the code as modified by sec_304 prior to the adoption of the liquidation plan no assets of sub will have been distributed in_kind transferred or sold to distributing except for transactions occurring in the ordinary course of business and transactions occurring more than three years prior to the adoption of the liquidation plan sub will report all earned_income represented by assets that will be distributed to its shareholders such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc b c d e e f g h i plr-123494-00 j k l m the fair_market_value of the assets of sub will exceed its liabilities both at the date of the adoption of the plan of complete_liquidation and immediately prior to the time the first liquidating_distribution is made there is no intercorporate debt existing between distributing and sub and none has been canceled forgiven or discounted except for transactions that occurred more than three years prior to the date of adoption of the liquidation plan distributing is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the proposed liquidation of sub have been fully disclosed the following representations have been made in connection with the contribution and the distribution n o p q r cash is being distributed in lieu of fractional shares of controlled the payment of cash in lieu of fractional shares of controlled is solely for the purposes of avoiding the expense and inconvenience to controlled of issuing fractional shares and does not represent separately bargained-for consideration the method used for handling fractional share interests is designed to limit the amount of cash received by any one shareholder to less than the value of one full share of controlled common_stock no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of distributing is representative of the corporation’s present operation and there have been no substantial operational changes since the date of the last financial statements submitted following the distribution distributing and controlled will each continue the active_conduct of its business independently and with its separate employees the distribution of the controlled stock is carried out for the following business_purpose to better enable distributing and controlled to manage operate and develop more efficiently their respective businesses the distribution is motivated in whole or substantial part by this corporate business purposes plr-123494-00 s t u v w x y z there is no plan or intention by any shareholder who own sec_5 or more of distributing and the management of distributing to its best knowledge is not aware of any plan or intention on the part of any particular remaining shareholder or security holder of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of either distributing or controlled after the transaction there is no plan or intention by distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of dollar_figure b of revproc_96_30 there is no plan or intention to liquidate distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing of more of the total combined voting power of all classes of distributing or controlled stock entitled to vote or or more of the total value of shares of all classes of distributing or controlled stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing or more of the total combined voting power of all classes of either distributing or controlled stock entitled to vote or stock possessing or more of the total value of all classes of stock of either distributing or controlled the total adjusted bases and the fair_market_value of the assets to be transferred by distributing to controlled each equals or exceeds the sum of the liabilities if any assumed by controlled plus any liabilities to which the transferred assets are subject and the liabilities assumed in the transaction and to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the assets being transferred distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transactions described above except with respect to any future obligations arising out of the continuing relations described above no intercorporate debt will exist between plr-123494-00 distributing and controlled at the time of or subsequent to the distribution of controlled stock if any indebtedness is owed by controlled to distributing after the distribution of the controlled stock such indebtedness will not constitute stock_or_securities aa immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further distributing’s excess_loss_account if any with respect to the controlled common_stock will be included in income immediately before the distribution see sec_1_1502-19 bb payments made in connection with all continuing transactions except under the tax_sharing_agreement if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length cc if the controlled share purchase rights are attached to controlled common_stock in the distribution such rights will not be traded apart from the controlled common_stock before the occurrence of certain triggering events before the occurrence of such events the share purchase rights may be redeemed by controlled at the time the controlled common_stock is issued to distributing and at the time of the distribution the likelihood that the controlled share purchase rights would be exercised will be both remote and uncertain based solely on the information submitted and the representations made we have concluded with respect to the liquidation that the liquidation will qualify as a complete_liquidation of sub within the meaning of sec_332 no gain_or_loss will be recognized by distributing on the receipt of the assets and liabilities of sub in the liquidation sec_332 no gain_or_loss will be recognized by sub on the distribution of its assets to or the assumption of its liabilities by distributing sec_336 a and b distributing’s basis in each asset received from sub as a result of the liquidation will equal the basis of that asset in the hands of sub immediately before the liquidation sec_334 plr-123494-00 distributing’s holding_period in each asset received from sub as a result of the liquidation will include the period during which that asset was held by sub sec_1223 distributing will succeed to and take into account the items of sub described in sec_381 subject_to the conditions and limitations specified in sec_382 sec_383 sec_384 and the regulations thereunder sec_381 and sec_1_381_a_-1 of the regulations except to the extent that sub 1's earnings_and_profits are reflected in distributing’s earning’s and profits distributing will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub as of the date of the liquidation sec_381 and sec_1_381_c_2_-1 and sec_1_1502-33 of the regulations any deficit in earnings_and_profits of sub or distributing will be used only to offset earnings_and_profits accumulated after the date of the liquidation sec_381 based solely on the information submitted and the representations made we have concluded with respect to the contribution and distribution that the transfer by distributing to controlled of the assets as described above followed by the distribution is a reorganization within the meaning of sec_368 distributing and controlled will each be a party to the reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing upon the transfer of its business b assets including certain stock to controlled in exchange or constructive exchange for controlled stock and the assumption by controlled of certain liabilities sec_361 and b and a controlled’s assumption of distributing’s obligation in connection with the plan_of_reorganization to issue distributing stock upon conversion of the convertible notes will be treated as an assumption of distributing’s liabilities for purposes of sec_357 no gain_or_loss will be recognized by distributing or controlled in respect of the issuance of controlled stock issued upon conversion of the convertible notes sec_1032 no gain_or_loss will be recognized by controlled on the receipt of the assets described above in exchange for controlled stock sec_1032 the basis of the assets received by controlled will be the same as the basis of such assets in the hands of distributing immediately prior to the exchange described above increased by the gain if any recognized by distributing sec_362 plr-123494-00 the holding_period of each asset received by controlled will include the period during which such asset was held by distributing before the contribution sec_1223 no gain_or_loss will be recognized by distributing upon the distribution of all the controlled stock to the distributing shareholders sec_361 no gain_or_loss will be recognized by and no amount will be included in the income of the distributing shareholders upon receipt of the controlled stock sec_355 the aggregate basis of the distributing and the controlled stock in the hands of the distributing shareholders immediately after the distribution will be the same as the aggregate basis of the distributing stock held by the distributing shareholders immediately before the distribution allocated in accordance with sec_1_358-2 of the regulations sec_358 the holding_period of the controlled stock received by the distributing shareholders will include the holding_period of the distributing stock with respect to which the distribution is made provided that the distributing stock is held as a capital_asset on the date of distribution sec_1223 the payment of cash in lieu of fractional share interests in controlled will be treated for federal_income_tax purposes as if the fractional shares were issued as part of the exchange and then were redeemed by controlled the cash payments will be treated as having been received as distributions in full payment in exchange for the stock redeemed as provided in sec_302 provided that the fractional share interest is a capital_asset in the hands of the exchanging shareholder the gain_or_loss will constitute capital_gain or loss subject_to the provisions and limitations of sec_1221 and sec_1222 provided that at the time of the distribution the share purchase rights remain contingent non-exercisable and subject_to redemption if issued the receipt of these rights by distributing or its shareholders will not be a distribution or receipt of property an exchange of stock or property either taxable or nontaxable or any other event giving rise to the realization of gross_income by distributing controlled or the distributing shareholders revrul_90_11 1990_1_cb_10 proper allocation of earnings_and_profits will be made between distributing and controlled under a of the regulations sec_312 plr-123494-00 payments made by distributing to controlled or by controlled to distributing under the tax_sharing_agreement i that have arisen or will arise for a taxable_period beginning on or before and ending after the distribution and ii that will not become fixed and ascertainable until after the distribution will be treated as occurring immediately before the distribution see 344_us_6 no opinion is expressed as to the tax treatment of the transactions under other provisions of the code or regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above ruling in accordance with a power_of_attorney on file in this office copies of this letter are being sent to your authorized representatives this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours associate chief_counsel corporate by reviewer branch corporate


office_of_chief_counsel department of the treasury i n t e r n a l r e v e n u e s e r v i c e washington d c number info release date cc ita b1 conex-104614-05 uil via regular mail the honorable ------------------------- u s house of representatives washington dc attention -------------------------- dear ---------------- this letter responds to your inquiry dated date on behalf of -------------------- ----------- of -------------------------and the ------------------------------------------------------------------ ------------ ---- asked about the new rules for vehicle donations under sec_170 of the internal_revenue_code the code -----------------also asked if sales of donated vehicles by these organizations are in direct furtherance of the organizations’ charitable purposes i hope the following general information is helpful the new rules limit the charitable_contribution_deduction for a donated vehicle that is sold without any significant intervening use or material improvement by the donee organization to the gross_proceeds received from the vehicle’s sale sec_170 of the code the secretary_of_the_treasury has the authority to issue regulations or other guidance exempting from this limit deductions for vehicles that are sold in direct furtherance of the donee organization’s charitable purpose the direct furtherance exception ----------------------of my staff called -----------------on date and explained to -- -----------------that the secretary_of_the_treasury must implement the direct furtherance exception in order for it to take effect until that time no exception exists from the general_rule under sec_170 -----------------also explained that if the secretary implements the direct furtherance exception -----------------can request a private_letter_ruling to allow us to examine ---- organizations’ information and determine whether sales of vehicles donated to ------ organizations would qualify for the direct furtherance exception i am enclosing revproc_2005_1 2005_1_irb_1 which explains how to request a private_letter_ruling if you need further assistance please contact me at --------------or ---------------------- -------------------------------------------------------------------------------------------------------------------- i d no ------------- at ------------- sincerely thomas a luxner chief branch office of associate chief_counsel income_tax accounting enclosure


t c no ll united_states tax_court sunoco inc and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date p claimed foreign tax_credits under sec_901 i r c on its consolidated_returns for and in these proceedings p seeks to change the method of computing the overall_limitation on the credit imposed by sec_904 i r c specifically p seeks to change the manner in which it allocates and apportions interest_expenses for purposes of computing taxable_income_from_sources_without_the_united_states the numerator of the limiting fraction p claims that it is entitled to offset interest_income against interest_expenses before it allocates and apportions net interest_expenses under sec_1_861-8 income_tax regs held sec_1_861-8 income_tax regs does not permit p to allocate and apportion net interest_expenses the tax court's decision in 101_tc_207 revd 108_f3d_12 2d cir which holds the opposite is hereby overruled -- - marjorie a burnett thomas d johnston robert l moore ii michael j mcgoldrick and nancy m seweryn for petitioner john a guarnieri richard h gannon and keith l gorman for respondent opinion whalen judge respondent determined the following deficiencies in petitioner's federal_income_tax year deficiency dollar_figure big_number big_number petitioner disputes the above deficiencies and further claims to have overpaid income taxes for and by at least dollar_figure dollar_figure and dollar_figure respectively after concessions there are three issues for decision in this case each issue will be the subject of a separate opinion the issue that is the subject of this opinion arises in the context of computing the overall limit imposed by sec_904 on the foreign tax_credits claimed by petitioner under sec_901 for taxable years and referred to herein as the years in issue in this opinion all section -3- references are to the internal_revenue_code as in effect during the years in issue unless stated otherwise this issue involves the computation of income_from_sources_without_the_united_states the numerator of the limiting fraction under sec_904 specifically in allocating and apportioning interest_expenses for purposes of computing taxable_income_from_sources_without_the_united_states for the years in issue the question is whether sec_1_861-8 income_tax regs contemplates that the aggregate interest_expense incurred by each member of petitioner's affiliated_group_of_corporations for the taxable_year can first be offset by that member's interest_income stated more simply the issue is whether netting of interest_expense and interest_income is permitted by sec_1_861-8 income_tax regs as a preliminary matter we must decide an evidentiary objection raised by respondent respondent filed a motion in limine to exclude the testimony of an economist dr j gregory ballentine who was called by petitioner as an expert witness respondent argues that dr ballentine's testimony should be excluded because it represents irrelevant and immaterial legal conclusions and opinions and does not assist the court respondent also contends - that dr ballentine's testimony should be excluded because it amounts to impermissible advocacy respondent also proffered the testimony of an expert witness but did so only to preserve the commissioner's right to offer such testimony if the testimony of petitioner's expert were admitted into evidence at trial the court permitted both experts to testify and reserved ruling on respondent's motion in limine petitioner offers the testimony of dr ballentine to assist the court in interpreting the economic terms in sec_1_861-8 income_tax regs according to his report dr ballentine reached two overall conclusions netting interest_income against interest_expense implements the economic concept of the fungibility of money as it relates to sources of funds interest_netting achieves a tax neutrality between borrowing and reducing cash balances as sources of funds petitioner argues the same two principles in the posttrial briefs filed on its behalf dr ballentine's report states that he was retained to provide an economic evaluation of netting interest_income against interest_expense for purposes of the tax rules that apportion interest_expense between domestic and foreign_source_income rule of the federal rules of evidence which governs the admissibility of expert testimony provides if scientific technical or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue a witness qualified as an expert by knowledge skill experience train- ing or education may testify thereto in the form of an opinion or otherwise thus expert testimony is admissible under rule if it assists the court to understand the evidence or to determine a fact in issue the parties agree that the subject issue involving the interpretation of sec_1_861-8 income_tax regs is a question of law and that there are no facts in dispute thus the question we must answer is whether dr ballentine's testimony aids the court in understanding the evidence dr ballentine's testimony provides economic examples and policy reasons as to why the appropriate measure of interest_expense is net interest_expense petitioner's brief reiterates these same concepts and includes the same examples we find that dr ballentine's report and testimony merely advocate petitioner's position and do not aid the court to understand the evidence or to determine a fact in issue fed r evid expert testimony is not admissible for such purposes an expert who is merely an advocate of a party's position does not assist the court in understanding the issue see 109_tc_21 109_tc_133 affd 165_f3d_822 lith cir 105_tc_16 affd 98_f3d_194 5th cir 92_tc_101 robertson v commissioner tcmemo_1999_130 affd without published opinion aftr2d ustc par big_number 9th cir see also 94_tc_570 in the context of valuation cases we have observed that experts may lose their usefulness and credibility when they merely become advocates for one side we conclude that dr ballentine's testimony does not assist the court in understanding the legal question issue and is not admissible accordingly we shall grant respondent's motion in limine most of the facts relating to the issue which is the subject of this opinion were stipulated by the parties the stipulated facts and accompanying exhibits are so found and are hereby incorporated in this opinion petitioner was incorporated under the laws of the commonwealth of pennsylvania at the time the instant petition was filed on its behalf petitioner's principal_place_of_business and mailing address was in philadelphia pennsylvania during each of the tax years in issue petitioner was the common parent of an affiliated_group_of_corporations as defined in sec_1504 and it filed a consolidated federal_income_tax return on behalf of itself and the other members of the affiliated_group as permitted by sec_1501 at all times material to this case petitioner and the other members of its affiliated_group engaged in the business of acquiring and developing oil gas and other energy properties of refining or otherwise preparing the natural_resources produced from the properties for sale to customers and of marketing and transporting those products to customers both in the united_states and abroad during the years in issue petitioner and its affiliated corporations earned_income from various sources domestic and foreign including income from interest dividends the production of oil_and_gas and other hydrocarbons and the sale of products derived from the production of hydrocarbons --- - petitioner chose to use the foreign_tax_credit under sec_901 in computing the tax_liability of its affiliated_group_of_corporations for consolidated_return years and in computing the overall_limitation on the credit under sec_904 petitioner allocated and apportioned a portion of the interest_expense of each member of the affiliated_group to sources without the united_states for purposes of computing the numerator of the limiting fraction under sec_904 e taxable_income_from_sources_without_the_united_states the following schedule sets forth the deduction for interest claimed by each member of petitioner's affiliated_group for each of the years in issue the portion of such amount that was allocated and apportioned to sources without the united_states for each year and the ratio of the latter to the former - apportioned interest to foreign ratio expense source income percent leasing co dollar_figure dollar_figure dollar_figure sun leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure kee leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure millcreek leasing co big_number big_number dollar_figure desun shipping big_number big_number dollar_figure eastern sun shipping big_number big_number dollar_figure ny sun shipping big_number big_number dollar_figure nj sun shipping big_number dollar_figure pa shipping big_number big_number dollar_figure phil sun shipping big_number dollar_figure western sun shipping big_number big_number dollar_figure sun transport big_number big_number dollar_figure sun note co big_number big_number dollar_figure north sea oil co big_number big_number dollar_figure totem ocean trailer big_number big_number dollar_figure big_number big_number apportioned interest to foreign ratio expense source income percent leasing co dollar_figure dollar_figure dollar_figure sun leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure kee leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure millcreek leasing co big_number big_number dollar_figure ny sun shipping big_number big_number dollar_figure nj sun shipping big_number big_number dollar_figure phil sun shipping big_number big_number dollar_figure texas sun shipping big_number big_number dollar_figure tropic sun shipping big_number big_number dollar_figure sun transport inc big_number dollar_figure heleasco fifteen big_number big_number dollar_figure sun note co big_number big_number dollar_figure big_number big_number -- - apportioned interest to foreign ratio expense source income percent kee leasing co dollar_figure dollar_figure dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure sun leasing co big_number big_number dollar_figure ny sun shipping big_number big_number dollar_figure phil sun shipping big_number big_number tropic sun shipping big_number big_number dollar_figure sun transport inc big_number big_number dollar_figure sun oil trading co big_number dollar_figure sun note co big_number big_number dollar_figure north sea sun oil co big_number big_number dollar_figure big_number big_number one of petitioner's exhibits lists this amount as dollar_figure see p infra apportioned interest to foreign ratio expense source income percent kee leasing co dollar_figure dollar_figure dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure sun leasing co big_number big_number dollar_figure millcreek leasing co big_number big_number dollar_figure tropic sun shipping big_number big_number dollar_figure sun transport inc big_number big_number dollar_figure sunoco overseas inc big_number dollar_figure sun refining mktg co big_number big_number dollar_figure sun oil trading co big_number big_number dollar_figure sun co inc big_number big_number dollar_figure sun oil intl big_number big_number dollar_figure north sea sun oil co big_number big_number dollar_figure claymont investment co big_number big_number dollar_figure big_number big_number the parties have stipulated that in most cases the interest_expense of each member of petitioner's affiliated_group_of_corporations was apportioned in general accordance with the optional_gross_income_method sic of apportionment described in sec_1 e vi the stipulation does not state which of the optional gross_income methods described by sec_1 e vi income_tax regs was used in the case of any member of the group in any event the following schedule shows the gross_income of each member of petitioner's affiliated_group_of_corporations for each of the subject years that member's gross_income_from_sources_without_the_united_states for each year and the ratio of the latter to the former foreign ratio gross_income gross_income percent leasing co dollar_figure dollar_figure dollar_figure sun leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure kee leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure leasing co big_number big_number dollar_figure millcreek leasing co big_number big_number dollar_figure desun shipping big_number big_number dollar_figure eastern sun shipping big_number big_number dollar_figure ny sun shipping big_number big_number dollar_figure nj sun shipping --big_number big_number -dollar_figure pa shipping big_number big_number dollar_figure phil sun shipping big_number big_number dollar_figure western sun shipping big_number big_number dollar_figure sun transport inc big_number big_number dollar_figure sun note co big_number big_number dollar_figure north sea oil co big_number big_number dollar_figure totem ocean trailer big_number big_number dollar_figure big_number big_number leasing co sun leasing co leasing co leasing co leasing co kee leasing co leasing co leasing co millcreek leasing co ny sun shipping nj sun shipping phil sun shipping texas sun shipping tropic sun shipping sun transport inc heleasco fifteen sun note co kee leasing co leasing co leasing co leasing co leasing co leasing co leasing co sun leasing co ny sun shipping phil sun shipping tropic sun shipping sun transport inc sun oil trading co sun note co north sea sun oil co kee leasing co leasing co leasing co leasing co sun leasing co millcreek leasing co tropic sun shipping sun transport inc sunoco overseas inc sun refining mktg co sun oil trading co sun co inc sun oil intl north sea sun oil co claymont investment co gross_income dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number gross_income dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number gross_income dollar_figure big_number big_number big_number big_number big_number big_number big_number -big_number big_number big_number big_number big_number big_number big_number big_number big_number foreign gross_income dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number foreign gross_income dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number foreign gross_income dollar_figure big_number big_number big_number big_number -big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number ratio percent ratio percent ratio percent in allocating and apportioning each member's interest_expense to sources without the united_states under one of the optional gross_income methods described by sec_1_861-8 vi income_tax regs petitioner started with the gross amount of each member's interest_expense for the taxable_year and did not offset that amount by the interest_income earned by that member during the year as mentioned above petitioner chose to use the foreign_tax_credit under sec_901 in computing the tax_liability of its affiliated_group_of_corporations for consolidated_return years and as to each of those years the amount of foreign taxes for which a taxpayer could claim credit was subject_to the overall_limitation of sec_904 under that limitation the amount of foreign_tax_credit could not exceed the tentative u s tax for the year e the u s tax before application of the foreign_tax_credit multiplied by a fraction the numerator of which is the taxable_income_from_sources_without_the_united_states and the denominator of which is the entire taxable_income sec_904 generally in the case of an affiliated_group_of_corporations the foreign_tax_credit is determined on a consolidated basis sec_1_1502-4 income_tax regs in computing the overall_limitation under sec_904 a for an affiliated_group the numerator of the limiting fraction is an amount equal to the total of the separate taxable incomes of the members of the group from sources without the united_states with certain adjustments that are not material to this case see sec_1_1502-4 income_tax regs the denominator of the limiting fraction under sec_904 is the consolidated_taxable_income of the group computed in accordance with sec_1_1502-11 income_tax regs sec_1_1502-4 income_tax regs thus for each of the subject consolidated_return years petitioner was required to compute the taxable_income_from_sources_without_the_united_states of each member of its affiliated_group_of_corporations sec_904 the total of those amounts is the numerator of the limiting fraction under sec_904 in these proceedings petitioner seeks to make two changes in the method used to allocate and apportion interest_expenses for purposes of computing each member's taxable_income_from_sources_without_the_united_states first petitioner seeks to apportion the interest_expenses of each member of its affiliated_group using the asset method described in sec_1_861-8 v income_tax regs for tax years and and using one of the optional gross_income methods described by section -- - e vi income_tax regs for tax_year as mentioned above petitioner had used one of the optional gross_income methods described by sec_1 e vi income_tax regs in apportioning interest_expenses on each of the subject returns respondent concedes that petitioner is entitled to make this change as long as all members joining the return use one of the optional gross_income methods described by sec_1_861-8 vi income_tax regs the second change sought by petitioner the change at the heart of the instant controversy involves petitioner's assertion that each member's interest_expense to be allocated and apportioned under sec_1 e income_tax regs for purposes of computing the overall_limitation under sec_904 is net interest_expense ie interest_expense for the year less interest_income but not less than zero rather than gross interest_expense respondent asserts that this change is improper to quantify petitioner's position the following schedule sets forth the interest_expense incurred by each member of petitioner's affiliated_group_of_corporations the interest_income earned by that member and the net interest_expense of that member ie interest_expense less interest_income but not less than zero _- _ interest interest net interest expense income expense leasing co dollar_figure dollar_figure -0- sun leasing co big_number big_number dollar_figure leasing co big_number big_number big_number leasing co big_number big_number big_number leasing co big_number big_number big_number leasing co big_number big_number leasing co big_number big_number -0- kee leasing co big_number big_number big_number leasing co big_number big_number -0- leasing co big_number big_number big_number millcreek leasing co big_number big_number --0- desun shipping big_number big_number -o- eastern sun shipping big_number big_number -o- ny sun shipping big_number big_number big_number nj sun shipping big_number big_number pa shipping big_number big_number -0- phil sun shipping big_number big_number big_number western sun shipping big_number --0- sun transport inc big_number big_number big_number sun note co big_number big_number -0- north sea oil co big_number big_number -0- totem ocean trailer big_number big_number -0- big_number big_number big_number interest interest net interest expense income expense leasing co dollar_figure dollar_figure -0- sun leasing co big_number big_number dollar_figure leasing co big_number big_number big_number leasing co big_number big_number big_number leasing co big_number big_number big_number kee leasing co big_number big_number big_number leasing co big_number big_number big_number leasing co big_number big_number big_number millcreek leasing co big_number big_number --0- ny sun shipping big_number big_number big_number nj sun shipping big_number big_number -o- philadelphia sun shipping big_number big_number big_number texas sun shipping big_number big_number --0- tropic sun shipping big_number big_number -o- sun transport inc big_number big_number big_number heleasco fifteen big_number big_number sun note co big_number big_number -0- big_number big_number big_number interest interest net interest expense income expense kee leasing co dollar_figure dollar_figure dollar_figure leasing co big_number big_number big_number leasing co big_number big_number big_number leasing co big_number big_number -0- leasing co big_number big_number -0- leasing co big_number big_number -0- leasing co big_number big_number big_number sun leasing co big_number big_number big_number ny sun shipping big_number big_number big_number phil sun shipping big_number big_number big_number tropic sun shipping big_number big_number -o- sun transport inc big_number big_number big_number sun oil trading co big_number -0- sun note co big_number big_number -0- north sea oil co big_number big_number big_number ' see p supra interest interest net interest expense income expense kee leasing co dollar_figure dollar_figure dollar_figure leasing co big_number big_number big_number leasing co big_number big_number big_number leasing co big_number big_number big_number sun leasing co big_number big_number big_number millcreek leasing co big_number big_number -0- tropic sun shipping big_number big_number -0- sun transport inc big_number big_number big_number sunoco overseas inc big_number big_number big_number sun refining mkt inc big_number big_number big_number sun oil trading co big_number big_number big_number sun co inc big_number big_number sun oil int big_number big_number -o0- north sea oil co big_number big_number big_number claymont investment co big_number big_number -0-- big_number big_number big_number big_number big_number big_number petitioner argues that it is entitled to use the amount in column three of the above schedule ie the net interest_expense of each member of its affiliated_group as the starting point for allocating and apportioning that member's interest_expense under sec_1_861-8 income_tax regs the parties have stipulated the amount of each member's interest_expense to be allocated and apportioned to sources without the united_states depending upon whether -- - netting is or is not permitted these stipulations are summarized in the appendix to this opinion in the appendix each member's interest_expense for and is apportioned to sources without the united_states in accordance with the asset method described by sec_1_861-8 v income_tax regs the parties have stipulated the ratio of each member's assets which relates to activities and properties that generated foreign_source_income during each year see generally sec_1 e v income_tax regs using that asset ratio the amount of a member's interest_expense to be apportioned to sources without the united_states is computed if netting is not permitted by multiplying the ratio and the member's gross interest_expense or if netting is permitted by multiplying the ratio and the member's net interest_expense in the appendix each member's interest_expense for is apportioned to sources without the united_states in accordance with one of the optional gross_income methods described by sec_1_861-8 vi income_tax regs generally under that provision assuming certain condi- tions are met the deduction for interest 1s apportioned to sources within or without the united_states ratably on the basis of a taxpayer's gross_income see id as shown in the appendix the parties have stipulated two sets of gross_income ratios for one set to be used assuming that netting is not permitted and the other set to be used assuming that netting 1s permitted the amount of a member's interest_expense to be apportioned to sources without the united_states is computed if netting is not permitted by multiplying the first gross_income ratio and the member's gross interest_expense or if netting is permitted by multiplying the second ratio and the member's net interest_expense the appendix has two schedules for one schedule summarizing the apportionment of gross interest e no netting and one summarizing the apportionment of net interest i1 e netting it appears that in computing the second set of gross_income ratios for the ratios to be used if netting is permitted the parties have adjusted the gross_income of each member by subtracting therefrom the amount of interest_income that is offset by interest_expense for example in the case of kee leasing co the first income ratio of dollar_figure percent the ratio to be used in apportioning interest if netting is not permitted was computed by dividing the company's gross_income_from_sources_without_the_united_states dollar_figure by the company's gross_income - - dollar_figure on the other hand the second income ratio of percent the ratio to be used in apportioning interest if netting is permitted was computed after the amount of netted interest_income dollar_figure was subtracted from the company's gross_income the denominator of the fraction thus the second ratio of percent was computed by dividing dollar_figure the company's gross_income_from_sources_without_the_united_states by dollar_figure the company's total gross_income less the amount of netted interest dollar_figure minus dollar_figure similar adjustments were made to the gross_income of each of the other members of petitioner's affiliated_group for purposes of computing the second gross_income ratio ie the ratio to be used in computing the interest_expense to be apportioned to sources without the united_states assuming that netting is permitted furthermore in the case of one of the members of petitioner's affiliated_group_of_corporations north sea sun oil co a similar adjustment was made to the numerator of the fraction that constitutes the gross_income ratio that is the interest_income earned by that company during dollar_figure was subtracted from the company's foreign source gross_income dollar_figure to arrive at dollar_figure the numerator of the fraction that amount was divided --- - by the excess of the company's total gross_income dollar_figure over its interest_income dollar_figure or dollar_figure to arrive at the gross_income ratio of dollar_figure percent thus in computing the second gross_income ratio for north sea sun oil co under sec_1_861-8 vi income_tax regs the ratio to be used if netting is permitted the interest_income earned by north sea sun oil co during was subtracted from both the numerator and the denominator of the fraction the interest_income earned during by each of the other members of plaintiff's affiliated_group was subtracted only from the denominator of the fraction in computing the second gross_income ratio for each of those companies we infer from this that the interest_income earned by north sea sun oil co in constituted gross_income_from_sources_without_the_united_states whereas the interest_income earned by each of the other members of petitioner's affiliated_group for constitutes gross_income from sources within the united_states the following schedule summarizes the revenue impact of the position of each of the parties with respect to the subject issue it shows based upon the parties' stipulation the aggregate interest_expense apportioned to -- - sources without the united_states for each of the years in issue as claimed on petitioner's consolidated_returns the aggregate interest_expense to be apportioned to foreign sources if there is no netting of interest_expense and interest_income and the aggregate amount to be so apportioned if there is netting of interest_expense and interest_income the last column of the schedule shows the difference between the amount of interest to be apportioned to sources without the united_states assuming that there is no netting and the amount of interest to be so apportioned assuming that there is netting interest_expense allocated and apportioned to sources without the united_states year per return no netting netting difference dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number thus as shown above if there is netting then the aggregate interest_expense to be allocated and apportioned to sources without the united_states in computing the overall_limitation on petitioner's foreign_tax_credit under sec_904 would be substantially less for each of the years in issue than the interest_expense to be allocated and apportioned to sources without the united_states if there is no netting this difference is dollar_figure dollar_figure dollar_figure and dollar_figure for the years in - - issue respectively thus the effect of netting would be to substantially increase petitioner's income_from_sources_without_the_united_states the numerator of the limiting fraction under sec_904 and to substantially increase the amount of petitioner's foreign_tax_credit for each of the years in issue both parties rely on the regulations promulgated under the source_rules viz sec_861 through especially sec_1_861-8 income_tax regs to support their position that netting 1s permitted or that netting is not permitted petitioner does not contend that the regulations are contrary to the statute or unlawful in any respect therefore as presented by the parties the issue in this case is whether the netting of interest_income and interest_expense is permitted by the regulations promulgated under sec_861 through principally sec_1_861-8 income_tax regs that were in effect during the years and generally referred to herein as the subject regulations at the outset we note that the principal regulation at issue in this case sec_1_861-8 income_tax regs was adopted on date effective for taxable years beginning after date - hereinafter referred to as the regulation fed reg date in the secretary_of_the_treasury issued temporary regulations dealing with the allocation and apportionment of interest_expense and certain other expenses for purposes of the foreign_tax_credit rules and certain other international tax provisions to reflect the revisions to those rules made by the passage of the tax_reform_act_of_1986 publaw_99_514 sec 100_stat_2544 sec_1_861-9t temporary income_tax regs fed reg date superseded the regulation for years beginning after date sec_1_861-9t contains virtually the same language found in sec_1_861-8 and regarding the allocations and apportionment of interest_expenses in addition sec_1_861-9t temporary income_tax regs supra explicitly provides that the term_interest refers to the gross amount of interest_expense incurred by a taxpayer in a given year emphasis added therefore the temporary_regulation explicitly prohibits netting for tax years beginning after date the temporary regulations were not given retroactive effect and thus do not apply to the years in issue in this case - - see sec_1_861-8t temporary income_tax regs fed reg date we do not agree with petitioner's contention that by promulgating the new rules without retroactive effect the secretary_of_the_treasury indicated that the express restrictive language requiring the use of gross interest_expense for purposes of allocation and apportionment was intended as a change rather than a clarification of prior_law to the contrary the temporary regulations including sec_1_861-9t temporary income_tax regs supra were promulgated to reflect the revisions made by the tax_reform_act_of_1986 including the enactment of sec_864 which substantially changed some of the rules for the allocation and apportionment of interest_expenses these new provisions were made effective for the most part for tax years beginning after date tax_reform_act_of_1986 publaw_99_514 sec c 100_stat_2545 it was appropriate to make the regulations reflecting those changes effective at the same time in these circumstances we do not believe that promulgating the new rules without retroactive effect suggests that the sentence in sec_1_861-9t temporary income_tax regs supra quoted above containing the words the gross amount of interest_expense was - - intended as a change rather than a clarification of prior_law the subject regulations are intended to be used in conjunction with certain operative sections of the code which require the determination of the taxable_income of the taxpayer from specific sources or activities see sec_1_861-8 income_tax regs the overall_limitation on the foreign_tax_credit provided in sec_904 is one such operative_section see id under the subject regulations the first step in determining a taxpayer's taxable_income from a particular source or activity is to categorize the taxpayer's gross_income into different groupings see sec_1_861-8 income_tax regs the regulations use the term statutory_grouping of gross_income to mean the gross_income from a specific source or activity which must first be determined in order to arrive at taxable_income from such specific source or activity under an operative_section sec_1_861-8 income_tax regs gross_income from other sources or activities is referred to as the residual_grouping of gross_income id the overall_limitation of sec_904 the operative_section in this case requires the taxpayer to determine taxable_income from sources without the united -- p7 - states thus the statutory_grouping of gross_income in this case is gross_income_from_sources_without_the_united_states and the residual_grouping of gross_income is gross_income from sources within the united_states see sec_1_861-8 f income_tax regs the term gross_income_from_sources_without_the_united_states the statutory_grouping of gross_income in this case consists of those items of gross_income specified in sec_862 plus the items of gross_income allocated or apportioned to such sources in accordance with sec_863 sec_1_861-1 income_tax regs similarly gross_income from sources within the united_states the residual_grouping of gross_income in this case consists of those items of gross_income specified in sec_861 plus the items of gross_income allocated or apportioned to such sources in accordance with sec_863 sec_1_861-1 income_tax regs for example in the case of interest_income sec_861 provides that as a general_rule the interest on bonds notes or other interest-bearing obligations of residents of the united_states corporate or otherwise shall be treated as income_from_sources_within_the_united_states see sec_1_861-2 income_tax regs sec_862 a provides that interest_income other than that - - derived from sources within the united_states shall be treated as income_from_sources_without_the_united_states see sec_1_862-1 income_tax regs the record in the instant case does not expressly provide the source of the interest_income earned by any member of petitioner's affiliated_group_of_corporations during any of the years in issue nevertheless we infer that the interest_income of petitioner's affiliated corporations for the most part would be treated under the source_rules as u s source income otherwise if the interest_income of petitioner's affiliated corporations were treated as foreign_source_income then in each case the interest_income would be included in the numerator of the limiting fraction under sec_904 and would offset the interest_expenses in that grouping thus if the interest_income of petitioner's affiliated corporations were foreign_source_income netting would have little or no impact on the amount of foreign_tax_credit this inference is confirmed in the case of the interest_income earned by the members of petitioner's group for as discussed above after finding the source of each item of the taxpayer's gross_income and grouping the items of gross_income into the statutory and residual groupings the next - step in determining taxable_income from a specific source or activity is to allocate and apportion the taxpayer's expenses losses and other deductions to each of the groupings of gross_income sec_1_861-8 b and c income_tax regs taxable_income from a particular source or activity is the difference between the aggregate items of gross_income in that grouping and the sum of the expenses losses and other deductions that are properly allocated and apportioned thereto and a ratable portion of any expenses losses or other deductions that cannot definitely be allocated to an item or class_of_gross_income see sec_861 sec_862 sec_1_861-1 sec_1 a income_tax regs the regulations provide rules of general applicability governing the allocation and apportionment of expenses losses and other deductions see sec_1_861-8 b c and d income_tax regs as well as rules governing the allocation and apportionment of specific deductions see sec_1_861-8 through income_tax regs specific rules for the allocation and apportionment of interest_expense are provided in sec_1_861-8 income_tax regs the principal rule_of general applicability is that a taxpayer's expenses losses and other deductions are to be -- - allocated to the class_of_gross_income to which each deduction is definitely related sec_1_861-8 b income_tax regs a deduction is considered definitely related to a class_of_gross_income if it is incurred as a result of or incident to an activity or in connection with property from which such class_of_gross_income is derived and thus the deduction bears a factual relationship to the class_of_gross_income sec_1 b and income_tax regs classes of gross_income are not predetermined but must be determined on the basis of the deductions to be allocated sec_1_861-8 income_tax regs they may consist of one or more items of gross_income enumerated in sec_61 such as compensation_for services gross_income derived from business gains derived from dealings in property interest rents royalties dividends etc sec_1_861-8 b income_tax regs if a deduction is definitely related to a class_of_gross_income that is included in more than one grouping of gross_income or if the deduction is definitely related to all of the taxpayer's gross_income then the regulations further provide that the deduction shall be apportioned by attributing the deduction to gross_income within the class to which the deduction has been allocated which is in the --- - statutory_grouping or in each of the statutory groupings and to gross_income within the class which is in the residual_grouping sec_1_861-8 income_tax regs this attribution must reflect to a reasonably close extent the factual relationship between the deduction and the grouping of gross_income see id the method of apportionment for a particular deduction can take into consideration various bases and factors such as a comparison of units sold attributable to the statutory_grouping and to the residual_grouping a comparison of the amount of gross_sales or receipts a comparison of the costs of goods sold a comparison of profit contribution a comparison of expenses_incurred assets used salaries paid space utilized and time spent which are attributable to the activities or properties giving rise to the class_of_gross_income and a comparison of the amount of gross_income in the statutory_grouping with the amount in the residual_grouping see id finally if the deduction is not definitely related to any gross_income then the regulations provide that it is to be apportioned ratably between the statutory_grouping and or among the statutory groupings and the residual_grouping in proportion to the amount of gross_income in - - each grouping see sec_1_861-8 c income_tax regs thus under the rules of general applicability the approach of the regulations with several exceptions is that every deduction has a definite factual relationship to a particular class_of_gross_income which constitutes less than all of the taxpayer's gross_income based upon that approach the rules of general applicability require each deduction to be allocated to the related class_of_gross_income and to be apportioned on some reasonable basis to the statutory and residual groupings of gross_income the regulations take a different approach in the specific rules governing the allocation and apportionment of interest_expenses set forth in sec_1_861-8 income_tax regs the regulations describe this approach as follows interest--- in general the method of allocation and apportionment for interest set forth in this paragraph e is based on the approach that money is fungible and that interest_expense is attributable to all activities and property regardless of any specific purposes for incurring an obligation on which interest is paid this approach recognizes that all activities and property require funds and that management has a great deal of flexibility as to the source and use of funds normally creditors of a taxpayer subject the money advanced to the taxpayer to the risk of the taxpayer's entire activities and look to the general credit of the - - taxpayer for payment of the debt when money is borrowed for a specific purpose such borrowing will generally free other funds for other purposes and it is reasonable under this approach to attribute part of the cost of borrowing to such other purposes for the method of determining the interest_deduction allowed to foreign_corporations under sec_882 see sec_1_882-5 sec_1_861-8 income_tax regs this is the provision of the regulations on which petitioner principally relies sec_1_861-8 income_tax regs based on the above approach the regulations provide as follows the aggregate of deductions for interest shall be considered related to all income producing activities and properties of the taxpayer and thus allocable to all the gross_income which the income producing activities and properties of the taxpayer generate have generated or could reasonably have been expected to generate sec_1_861-8 income_tax regs after stating the general_rule in sec_1 e income_tax regs that interest_expense is allocable to all gross_income of the taxpayer the regulations provide various methods to apportion the taxpayer's interest_expense between the statutory_grouping of gross_income or among the statutory groupings of gross_income and the residual_grouping see sec_1_861-8 v and vi income_tax regs under the - -- asset method the deduction for interest is apportioned generally in accordance with the value book_value or fair_market_value of the assets utilized or invested in the activity or property see sec_1_861-8 v income_tax regs this is the method that petitioner wishes to use for tax years and as mentioned above under the optional gross_income methods the deduction for interest is apportioned generally on the basis of the gross_income in the statutory_grouping or groupings and in the residual_grouping sec_1_861-8 vi income_tax regs this is the method that petitioner wishes to use for tax_year as mentioned above significantly the regulations provide an exception that applies in the case of interest incurred specifically to purchase specific property see sec_1_861-8 iv income_tax regs in that case the interest is treated as definitely related to the gross_income derived from the property and is apportioned accordingly see id in order for this exception to apply certain facts and circumstances enumerated in the regulations must be found these include the fact that the indebtedness was incurred to purchase the specific property the fact that the proceeds of the loan were actually applied to that purpose the fact that the property is the only security for the - - loan the fact that the return cashflow on or from the property will be sufficient to satisfy the payments under the loan and the fact that the loan agreements place restrictions on the disposal or use of the property see id where it is found that an interest_deduction is definitely related solely to specific property the interest deductions are allocated solely to the gross_income derived from the specific property see sec_1 e iv b income_tax regs thus the income from the specific property is placed in a grouping of gross_income in accordance with the usual rules for sourcing gross_income see sec_1_861-2 through income_tax regs and the interest_deduction is directly allocated to such gross_income see sec_1_861-8 iv b income_tax regs finally in the case of nonbusiness interest such as interest_paid by an individual on a mortgage on his personal_residence the interest is treated as not definitely related to any class_of_gross_income see sec_1_861-8 c income_tax regs and is apportioned ratably between the statutory_grouping or among the statutory groupings and the residual_grouping in - - proportion to the amount of gross_income in each grouping see sec_1_861-8 income_tax regs petitioner argues that under the version of the sec_861 regulations in effect during the years in issue it may allocate and apportion net interest rather than gross interest_expense in calculating taxable_income_from_sources_without_the_united_states for purposes of sec_904 petitioner's position is based on its reading of sec_1_861-8 income_tax regs which 1s quoted above petitioner emphasizes that sec_1_861-8 income_tax regs states in general that the method of allocation and apportionment for interest is based on the approach that money is fungible and recognizes that all activities and property require funds and that management has a great deal of flexibility as to the source and use of funds id petitioner notes that the regulation refers to interest as the cost of borrowing in the context of the fungibility of money based thereon petitioner argues that the language of the regulation raises a contextual ambiguity with respect to the precise definition of ‘interest' and 'the cost of borrowing' according to petitioner the term_interest can mean either net interest or gross interest depending on the context petitioner argues that in the context of -- - the subject regulation which is based upon the fungibility of money approach and absent an express rule to the contrary the term_interest should be recognized to mean net interest_expense e gross interest_expense less interest_income petitioner asserts that the following simplified example demonstrates that recognizing interest or the cost of borrowing as net interest_expense implements the fungibility of money principle assume that a business needs dollar_figure and has dollar_figure million in short-term instruments bearing interest pincite percent per year and the capacity to borrow funds with no fees and pincite percent per year the business can obtain the dollar_figure by reducing its holding of short-term interest bearing instruments or by borrowing rither choice has exactly the same effect on the net_income of the business if the business borrows interest_expense will increase by dollar_figure per year if the business sells the instruments interest_income will decrease by dollar_figure per year petitioner argues that the two sources of funds in the above example incurring debt and selling short-term interest bearing assets are fungible and should be treated as fungible under the source_rules as would take place by recognizing interest as net interest_expense petitioner also argues that a corollary to the fungibility of these two sources of funds is the fact that reduced interest -- - income is essentially equivalent to increased interest_expense petitioner gives the following variation of the above example to illustrate its position that taxpayers in the same economic situation should be treated the same by interpreting interest and cost of borrowing as used in sec_1_861-8 income_tax regs to mean net interest suppose business a has an immediate need of dollar_figure and uncertain future needs anda line of credit of dollar_figure million pincite percent and immediately draws dollar_figure on the line of credit the interest_expenses on the dollar_figure would be dollar_figure rather than dollar_figure in contrast business b has a substantially identical need of dollar_figure immediately and uncertain future needs but has no line of credit so business b obtains a loan from a bank for dollar_figure million and invests the surplus dollar_figure in short-term instruments bearing percent although business b's gross interest_expense would be dollar_figure its cost of borrowing would be best described as dollar_figure dollar_figure-dollar_figure petitioner argues that in the context of sec_1 e income_tax regs which is based upon the fungibility of money and management's flexibility as to sources of funds the two firms in the above example are in the same economic situation and the cost of borrowing incurred by both firms should be treated the same as would take place by recognizing interest as net interest_expense -- -- petitioner relies heavily on the opinion of this court in 101_tc_207 revd 108_f3d_12 2d cir involving the same issue viz whether a taxpayer may offset interest_income and interest_expense in determining the amount of the interest_deduction to be allocated and apportioned under sec_1_861-8 income_tax regs in that case the issue arose in the context of computing the combined taxable_income cti of the taxpayer and its domestic_international_sales_corporation disc attributable to gqualified export receipts derived from the sale by the disc of export_property see bowater inc subs v commissioner supra generally in computing cti attributable to qualified_export_receipts expenses are to be allocated and apportioned in a manner consistent with the rules set forth in sec_1_861-8 income_tax regs sec_1_994-1 income_tax regs in bowater inc subs v commissioner supra we held that interest_expenses can be offset by interest_income before the net interest_expense is apportioned under sec_1 e income_tax regs id petitioner argues that we should follow bowater inc subs v commissioner supra in the instant case as we have on two prior occasions 106_tc_1 and computervision intl corp v commissioner tcmemo_1996_131 vacated and remanded 164_f3d_73 1st cir petitioner also argues that we should reject the faulty reasoning of the court_of_appeals for the second circuit in its opinion reversing this court's bowater inc opinion see 108_f3d_12 2d cir respondent argues that the subject regulations are not ambiguous to the contrary respondent states that the plain language of the regulations promulgated under sec_861 mandates the apportionment of interest_expense among all income producing activities including those that generate interest_income and rejects the netting' of interest_expense and interest_income respondent argues that this is made clear by two examples in the regulations examples and of sec_1_861-8 income_tax regs in which 'gross' interest_expense e without reduction for interest_income 1s apportioned among each of the hypothetical taxpayer's income producing activities including those that generate interest_income respondent also argues that petitioner misinterprets the regulation's fungibility concept finally respondent argues that petitioner's position ignores the fact that the regulations promulgated under - al --- sec_861 apportion deductions which in the case of interest_expenses means the amount deductible under sec_163 in this connection respondent points out that sec_1_861-8 income_tax regs is headed allocation and apportionment of deductions in general and that there is nothing in the regulations suggesting that the word 'deduction' should be defined differently under sec_1_861-8 than elsewhere in the internal_revenue_code we disagree with petitioner that the language of sec_1_861-8 income_tax regs raises a contextual ambiguity with respect to the precise definition of the terms ‘interest expense' and 'the cost of borrowing ' we also disagree that those terms were intended or can be interpreted in the context of sec_1_861-8 income_tax regs to refer to net interest_expense in our view the allocation and apportionment of net interest_expense under sec_1_861-8 income_tax regs is not permitted by the regulations it would subvert the operation of the source_rules and it would lead to incongruous and erroneous results we believe that petitioner misconstrues sec_1 e income_tax regs and finds an ambiguity where none exists as discussed above the rules of general - -- applicability for the allocation and apportionment of expenses losses and other deductions set forth in sec_1_861-8 b and c income_tax regs are based on the approach that an expense loss or other deduction should be allocated to a class of income composed of less than the taxpayer's entire gross_income as to which the deduction bears a factual relationship and then if necessary apportioned between or among the statutory and residual groupings of gross_income see sec_1_861-8 b and c income_tax regs on the other hand the rules that specifically govern the allocation and apportionment of interest_expenses with two limited exceptions take the approach that interest_expenses are related to all income-producing activities and properties of the taxpayer and thus are allocable to all of the taxpayer's gross_income see sec_1_861-8 and income_tax regs the regulations state that the different approach for allocating interest_expenses is based on the fact that money is fungible and that interest_expense is attributable to all activities and property regardless of any specific purpose for incurring an obligation on which interest is paid sec_1_861-8 income_tax regs thus the regulations use the phrase money is fungible -- - in sec_1_861-8 income_tax regs simply to explain why the rules specifically dealing with interest_expenses allocate interest_expenses to all of the taxpayer's gross_income whereas the rules of general applicability treat other deductions as related to one or more classes of income in order to facilitate our discussion of the positions of the parties it is helpful to review the following example assume that during the year a taxpayer a domestic_corporation had gross operating income from domestic sales of dollar_figure gross operating income from foreign sales of dollar_figure operating_expenses of dollar_figure attributable to domestic sales and operating_expenses of dollar_figure attributable to foreign sales assume further that during the same year the taxpayer realized interest_income from u s sources of dollar_figure and interest_expense of dollar_figure finally assume that the ratio of the value of the assets which relate to activities and properties that generate foreign_source_income to the value of all of the taxpayer's assets is the same as the ratio of the taxpayer's gross_income from foreign sources to total gross_income based upon these facts the computation of the taxpayer's taxable_income from u s and foreign sources assuming that netting is not permitted and the proportion -- -- of each to the taxpayer's entire taxable_income as contemplated by sec_904 are shown in the following schedule no netting total u s source foreign source gross_income operating income dollar_figure dollar_figure dollar_figure interest_income big_number big_number -o- total big_number big_number big_number gross_income ratio expenses operating_expenses big_number interest_expense big_number big_number big_number total big_number big_number big_number taxable_income big_number big_number sec_904 ratio petitioner's position is that sec_1_861-8 income_tax regs permits a taxpayer to offset interest_expense with interest_income before net interest_expense is allocated and apportioned under sec_1 e income_tax regs to the different groupings of gross_income for purposes of computing the taxpayer's taxable_income in each grouping based on petitioner's position the computation of the taxpayer's taxable_income from u s and foreign sources and the proportion of each to the taxpayer's entire taxable_income as contemplated by sec_904 are shown in the following schedule with netting gross_income total u -o source foreign source operating income dollar_figure dollar_figure dollar_figure interest_income -0- -o0- -0- total big_number big_number big_number gross_income ratio expenses operating_expenses big_number interest_expense big_number big_number total big_number big_number big_number taxable_income big_number big_number sec_904 ratio thus in this example interest_income has the effect of increasing percent to dollar_figure percent taxable_income souurces dollar_figure the netting of interest_expense and from the proportion of the taxpayer's that is attributable to foreign 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 ie dollar_figure 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 1ie foreign source and the residual_grouping ie united_states source under sec_1_861-8 income_tax regs accordingly the aggregate deductions used in the netting computation are less than actual aggregate deductions -- - thus taxpayer's taxable_income ie 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 sec_904 would be as follows with netting total u s source foreign source gross_income operating income dollar_figure dollar_figure dollar_figure interest_income -o- total big_number big_number big_number gross_income ratio expenses operating_expenses big_number interest_expense big_number big_number total big_number big_number taxable_income big_number big_number big_number sec_904 ratio ' based upon taxable_income of dollar_figure thus as illustrated above if the taxpayer's gross_income is not reduced then the taxpayer's taxable_income dollar_figure would be overstated by the amount of the interest_income that is offset by interest_expense dollar_figure and the sec_904 ratio would not be based upon the a7 - taxpayer's entire taxable_income for the same taxable_year sec_904 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 sec_904 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 sec_904 than not netting in the above example we assumed that all of the interest_income dollar_figure was from u s sources in that case the sec_904 ratio computed without netting wa sec_28 percent but was increased to dollar_figure percent by netting on the other hand if we assume that the interest_income is entirely from foreign sources then the sec_904 a ratio without netting i sec_52 percent computed as follows no netting total s source foreign source gross_income operating income dollar_figure dollar_figure dollar_figure interest_income big_number -o- big_number total big_number big_number gross_income ratio expenses operating_expenses big_number interest_expense big_number big_number big_number total big_number big_number taxable_income big_number sec_904 ratio if interest_expense and interest_income are netted however the ratio is reduced to dollar_figure 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 sec_1_861-8 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 --- - in our view petitioner's position that it may allocate and apportion net rather than gross interest_expense under sec_1_861-8 income_tax regs is foreclosed by the language of that regulation sec_1_861-8 income_tax regs provides that the aggregate of deductions for interest are allocable to all the gross_income of the taxpayer for the year as we read it sec_1_861-8 income_tax regs thus directs that the gross amount of the taxpayer's interest deductions ie the aggregate of deductions for interest be allocated to all of the taxpayer's gross_income in effect sec_1_861-8 income_tax regs forecloses petitioner's position that net interest_expense ie less than the aggregate of deduction for interest can be allocated to less than all of the taxpayer's gross_income ie the excess of the taxpayer's gross_income over the portion of the taxpayer's interest_income that is offset by interest_expenses furthermore petitioner's position that it may allocate and apportion net rather than gross interest_expense is foreclosed by sec_861 a and the regulations promulgated thereunder including sec_1_861-2 and sec_1_862-1 income_tax regs those -- - 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 sec_1_861-2 sec_1_862-1 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 as shown in the appendix moreover petitioner's position that it is entitled to allocate net interest_expense under sec_1_861-8 -- - income_tax regs means that the taxpayer's interest_income to the extent that it is offset by interest_expense 1s not included in the groupings of gross_income i1 gross_income from sources within and without the united_states contrary to sec_861 and sec_862 a sec_861 thus in our view interest_netting would subvert the operation of the source_rules generally as discussed above the source_rules operate by assigning items of gross_income to different groupings of gross_income such as income from sources within and without the united_states in accordance with standards set out in the statute and by allocating and apportioning the taxpayer's expenses losses and other deductions to the different groupings items of gross_income that constitute interest are assigned to groupings of gross_income from sources within and without the united_states generally in accordance with the residence of the payor see sec_1_861-2 income_tax regs under interest_netting interest_income is offset by interest_expense and only net interest_expense is allocated and apportioned under the source_rules in effect the source of the interest_income that is offset is not taken into account in the groupings of gross_income and taxable - - income as contemplated under the source_rules netting would thus subvert the operation of those rules netting would also lead to the incongruous and erroneous results depicted in the hypothetical example discussed above in which a taxpayer who realized interest_income entirely from foreign sources is treated the same as a taxpayer who realized the same interest_income entirely from united_states sources as discussed above to the extent that a relatively greater amount of interest_income absorbed in the netting process is from foreign sources then netting actually produces a lower taxable_income from foreign sources than not netting as mentioned above the issue in this case was first decided in connection with the regulations in 101_tc_207 in light of the opinion of the u s court_of_appeals for the second circuit reversing our opinion in bowater inc it 1s appropriate to reconsider our bowater inc opinion it is also appropriate to reconsider bowater inc in light of the opinion of the u s court_of_appeals for the fifth circuit in 238_f3d_603 5th cir in which that court holds that interest_netting is not permitted -- - under sec_1_861-8 income_tax regs in this connection we note that our opinion in bowater inc in part had relied upon the reasoning of a prior opinion of the u s court_of_appeals for the fifth circuit involving the predecessor of the regulation 911_f2d_1128 5th cir revg 92_tc_1276 following our reconsideration of this issue we now agree with both the u s courts of appeals for the second and fifth circuits that the subject regulation sec_1_861-8 income_tax regs does not permit the netting of interest_income and interest_expense in light of that we hereby overrule our opinion in 101_tc_207 for reasons set forth above an appropriate order will be issued granting respondent’s motion in limine reviewed by the court swift gerber ruwe colvin halpern beghe chiechi laro foley vasquez gale and marvel jj agree with this opinion wells and thornton jj did not participate in the consideration of this opinion -- -- appendix interest net interest asset ratio interest apportioned to foreign expense expense percent source income no netting netting leasing co dollar_figure -0- dollar_figure dollar_figure --0- sun leasing co big_number dollar_figure dollar_figure big_number dollar_figure leasing co big_number big_number dollar_figure big_number big_number leasing co big_number big_number dollar_figure big_number big_number leasing co big_number big_number dollar_figure big_number big_number leasing co big_number big_number dollar_figure big_number big_number leasing co big_number -0- dollar_figure big_number -0- kee leasing co big_number big_number big_number big_number leasing co big_number -0- dollar_figure big_number -0- leasing co big_number big_number dollar_figure big_number big_number millcreek leasing co big_number -0- dollar_figure big_number -0- de sun shipping big_number -o- dollar_figure -o- eastern sun shipping big_number --0- qodollar_figure --0- ny sun shipping big_number big_number dollar_figure big_number big_number nj sun shipping big_number big_number dollar_figure big_number big_number pa shipping big_number -o- dollar_figure big_number -o- phil sun shipping big_number big_number dollar_figure big_number big_number western sun shipping big_number --0- dollar_figure -0- -o- sun transport inc big_number big_number dollar_figure big_number big_number sun note co big_number -0- dollar_figure big_number -0- north sea oil co big_number --0- dollar_figure big_number --0- totem ocean trailer big_number -0- dollar_figure big_number -0- total big_number big_number big_number big_number interest net interest asset ratio interest apportioned to foreign expense expense percent source income no netting netting leasing co dollar_figure -0- dollar_figure dollar_figure -0- sun leasing co big_number dollar_figure dollar_figure big_number dollar_figure leasing co big_number big_number dollar_figure big_number big_number leasing co big_number big_number dollar_figure big_number big_number leasing co big_number big_number dollar_figure big_number big_number kee leasing co big_number big_number dollar_figure big_number big_number leasing co big_number big_number dollar_figure big_number big_number leasing co big_number big_number dollar_figure big_number big_number millcreek leasing co big_number --0- dollar_figure big_number -o- ny sun shipping big_number big_number dollar_figure big_number big_number nj sun shipping co big_number -0- dollar_figure big_number -0- phil sun shipping big_number big_number dollar_figure big_number big_number texas sun shipping big_number --0- dollar_figure big_number -0- tropic sun shipping big_number -o- dollar_figure --o- sun transport inc big_number big_number dollar_figure big_number big_number heleasco fifteen big_number big_number dollar_figure big_number big_number sun note co big_number dollar_figure big_number total big_number big_number big_number big_number interest net interest asset ratio interest apportioned to foreign expense expense percent source income no netting netting kee leasing co dollar_figure dollar_figure dollar_figure dollar_figure s70 leasing co big_number big_number dollar_figure big_number big_number leasing co big_number big_number dollar_figure big_number leasing co big_number -0- dollar_figure big_number -0- leasing co big_number -0- dollar_figure big_number -0- leasing co big_number -0- dollar_figure -0- leasing co big_number big_number dollar_figure big_number big_number sun leasing co big_number big_number dollar_figure big_number big_number ny sun shipping big_number big_number dollar_figure big_number big_number phil sun shipping big_number big_number dollar_figure big_number big_number tropic sun shipping big_number -0- dollar_figure big_number -0- sun transport inc big_number big_number dollar_figure big_number big_number sun oil trading co -0- dollar_figure -0- -0- sun note co big_number -0- dollar_figure big_number -0- north sea sun oil co big_number big_number dollar_figure big_number big_number total big_number big_number big_number big_number ' see p supra no netting kee leasing co leasing co leasing co leasing co sun leasing co millcreek leasing co tropic sun shipping sun transport inc sunoco overseas inc sun refining marketing co sun oil trading co sun co inc sun oil intl north sea sun oil co claymont investment co total gross_income dollar_figure big_number big_number big_number big_number big_number big_number big_number -big_number big_number big_number big_number big_number big_number big_number asset ratio interest foreign gi percent expense dollar_figure dollar_figure dollar_figure big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number -83 dollar_figure big_number big_number dollar_figure big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number dollar_figure big_number big_number big_number big_number gross_income ratio sec_1_861-8 sec_1_861-8 sec_1_861-8 e interest percent vi a vi b vi b apportioned dollar_figure dollar_figure dollar_figure dollar_figure big_number dollar_figure big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure dollar_figure big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure dollar_figure big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number ' cannot reconcile this amount with the fact that this corporation realized interest_income of dollar_figure during foreign source gross_income divided by total gross_income ie dollar_figure x dollar_figure percent x percent it appears that this amount should be dollar_figure big_number netting gross asset income ratio interest interest ratio sec_1_861-8 sec_1_861-8 e sec_1_861-8 e interest gross_income foreign gi percent expense income net interest percent vi a vi b vi b apportioned kee leasing co dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure leasing co big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number leasing co big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number leasing co big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number sun leasing co big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number millcreek leasing co 1big_number -big_number dollar_figure big_number big_number -0- dollar_figure -0- -0- tropic sun shipping big_number big_number dollar_figure big_number -0- -0- -0- sun transport inc big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number sunoco overseas inc -big_number big_number dollar_figure big_number big_number big_number dollar_figure - big_number big_number sun refining marketing co big_number big_number dollar_figure big_number big_number big_number dollar_figure - big_number big_number sun oil trading co big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number sun company inc big_number big_number dollar_figure big_number big_number big_number dollar_figure - big_number big_number sun oil intl big_number big_number dollar_figure big_number big_number -0- dollar_figure -0- -0- north sea sun oil co big_number big_number dollar_figure big_number big_number big_number dollar_figure - big_number big_number claymont investment co big_number big_number dollar_figure big_number -0- dollar_figure -0- --0- total big_number big_number big_number big_number big_number big_number big_number cannot reconcile this amount with the fact that this corporation realized interest_income of dollar_figure during foreign source gross_income divided by the excess of total gross_income over interest_income it appears that this percentage should be dollar_figure percent ie dollar_figure dollar_figure -- dollar_figure it appears that this amount should be dollar_figure ie dollar_figure x dollar_figure percent x percent interest_income treated as foreign_source_income thus in computing the allocation_ratio dollar_figure percent denominator of the fraction dollar_figure - dollar_figure dollar_figure -- dollar_figure interest_income is removed from both the numerator and the