Court Opinion

ID: 4614946
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:31:18.361568+00
Date Added: 2024-06-11T07:54:52.277928
License: Public Domain

SUNOCO, INC. AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSunoco, Inc. v. Comm'rNo. 19631-97United States Tax Court118 T.C. 181; 2002 U.S. Tax Ct. LEXIS 12; 118 T.C. No. 11; March 15, 2002, Filed *12  Interest income treated as foreign source income. Income Tax Regulations do not permit netting of interest income and interest expense. Motion in limine granted..  P claimed foreign tax credits under sec. 901(a), I.R.C., on   its consolidated returns for 1982, 1983, 1984, and 1986. In   these proceedings, P seeks to change the method of computing the   overall limitation on the credit imposed by sec. 904(a), 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(e)(2), Income Tax Regs.     Held: Sec. 1.861-8(e)(2), Income Tax Regs., does not   permit P to allocate and apportion net interest expenses. The*13     Tax Court's decision in Bowater, Inc., & Subs. v. Commissioner, 101 T.C. 207">101 T.C. 207 (1993), revd. 108 F.3d 12">108 F.3d 12 (2d   Cir. 1997), 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.  Whalen, Laurence J.WHALEN*181  OPINIONWHALEN, Judge: Respondent determined the following deficiencies in petitioner's Federal income tax:   Year            Deficiency   1979           $ 10,563,157   1981             5,163,449   1983            35,916,359Petitioner disputes the above deficiencies and further claims to have overpaid income taxes for 1979, 1981, and 1983 by at least $ 25,082,591, $ 6,881,055, and $ 14,137,211, 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 *182  bcontext of computing the overall limit imposed*14  by section 904(a) on the foreign tax credits claimed by petitioner under section 901(a) for taxable years 1982, 1983, 1984, and 1986, referred to herein as the years in issue. In this opinion, all section 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 section 904(a). 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 section 1.861-8(e)(2), 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 section 1.861-8(e)(2), Income Tax Regs.As a preliminary matter, we must decide an evidentiary objection raised by respondent. Respondent filed a motion*15  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 section 1.861-8(e)(2)", Income Tax Regs. According to his report, Dr. Ballentine reached two overall conclusions: (1) "Netting interest income against interest expense implements the economic concept of the fungibility of money as it relates to sources of funds"; (2) "interest netting achieves a tax neutrality *183  between borrowing and reducing*16  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 702 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, training, or education, may   testify thereto in the form of an opinion or otherwise.* * *Thus, expert testimony is admissible under rule 702 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 section 1.861-8(e)(2), Income Tax Regs., is a question of law and that there are no facts in dispute. Thus, the question we must answer*17  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. 702. 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 Hosp. Corp. of Am. v. Commissioner, 109 T.C. 21">109 T.C. 21 (1997); Alumax, Inc. v. Commissioner, 109 T.C. 133">109 T.C. 133 (1997), affd.  165 F.3d 822">165 F.3d 822 (11th Cir. 1999); Snap-Drape, Inc. v. Commissioner, 105 T.C. 16">105 T.C. 16, 20 (1995), affd.  98 F.3d 194">98 F.3d 194 (5th Cir. 1996); Laureys v. Commissioner, 92 T.C. 101">92 T.C. 101, 129 (1989); Robertson v. Commissioner, T.C. Memo. 1999-130, affd. without published opinion 5 Fed. Appx. 702">5 Fed. Appx. 702, 87 A.F.T.R.2d (RIA) 1274">87 A.F.T.R.2d (RIA) 1274, 2001-1 U.S. Tax Cas. (CCH) P50,276 (9th Cir. 2001);*18  see also Estate of Halas v. Commissioner, 94 T.C. 570">94 T.C. 570, 577 (1990) (" In the context of valuation cases, we have observed that experts may lose *184  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 section 1504(a), and it filed a consolidated Federal income tax return on behalf of itself and the other members of the affiliated group as permitted by section 1501.At all times material*19  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 section 901(a) in computing the tax liability of its affiliated group of corporations for consolidated return years 1982, 1983, 1984, and 1986. In computing the overall limitation on the credit under section 904(a), 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 section 904(a); i.e., taxable income from sources*20  without the United States. The following schedule sets forth the deduction for interest claimed by each member of petitioner's affiliated *185  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   1982           expense     source income   percent   ____           ________     _____________   _______650 Leasing Co.        $ 682,931      $ 235,504    37.12Sun Leasing Co.        4,729,086      2,729,628    57.72666 Leasing Co.        4,072,539      2,138,083    52.50670 Leasing Co.        1,830,136       853,210    46.62673 Leasing Co.        1,627,381       727,928    44.73675 Leasing Co.        1,983,276      1,002,744    50.56652 Leasing Co.       *21    794,330       356,448    44.87Kee Leasing Co.         581,235       403,610    69.44653 Leasing Co.         814,727       398,972    48.97667 Leasing Co.        3,286,585      1,709,024    52.00Millcreek Leasing Co.      830,407       202,492    24.38DeSun Shipping          47,658       33,697    70.71Eastern Sun Shipping       37,115       24,183    65.16NY Sun Shipping        9,970,340      8,851,391    88.78NJ Sun Shipping         143,340       116,170    81.05PA Shipping           46,423       29,294    63.10Phil Sun Shipping      10,809,958      3,214,297    29.74Western Sun Shipping       50,003       31,980    63.96Sun Transport, Inc.      3,650,045      1,465,486    40.15Sun Note Co.         31,066,253     31,066,253    100.00North Sea Oil Co.        65,897       65,897    100.00Totem*22  Ocean Trailer       46,949       29,813    63.50              __________     __________              77,166,614     55,704,104                       Apportioned              Interest      to foreign    Ratio   1983           expense     source income   percent   ____           ________     _____________   _______650 Leasing Co.        $ 612,220      $ 357,904    58.46Sun Leasing Co.        4,736,241      2,808,118    59.29666 Leasing Co.        4,084,197      2,580,396    63.18670 Leasing Co.        1,756,214       973,645    55.44652 Leasing Co.         714,282       312,641    43.77Kee Leasing Co.         504,412       357,058    70.79653 Leasing Co.         736,315       375,962    51.06667 Leasing Co.        3,160,356      2,019,783*23     63.91Millcreek Leasing Co.      742,214       365,707    49.27*186  NY Sun Shipping        9,849,306      8,573,395    87.05NJ Sun Shipping         208,102       129,266    62.12Phil Sun Shipping      10,688,995      3,437,299    32.16Texas Sun Shipping        33,963       12,819    37.74Tropic Sun Shipping       474,700       272,684    57.44Sun Transport, Inc.      2,644,781       926,810    35.04Heleasco Fifteen       1,444,639     1,297,009     89.78Sun Note Co.         25,667,812     25,634,424    99.87              __________     __________              68,058,749     50,434,920                       Apportioned              Interest      to foreign    Ratio   1984           expense     source income   percent   ____           ________ *24      _____________   _______Kee Leasing Co.        $ 408,197     $ 154,339     37.81666 Leasing Co.        4,083,327     1,964,080     48.10670 Leasing Co.        1,669,360      610,485     36.57650 Leasing Co.         536,038      270,003     50.37652 Leasing Co.         613,066      176,024     28.71653 Leasing Co.         636,635      118,974     18.69667 Leasing Co.        3,018,359      885,134     29.33Sun Leasing Co.        4,689,864     2,059,788     43.92NY Sun Shipping        9,712,823     9,165,743     94.37Phil Sun Shipping      10,551,646     4,687,164     44.43Tropic Sun Shipping       644,883      313,703     48.64Sun Transport, Inc.      3,091,754      985,633     31.88Sun Oil Trading Co.       1627,633       32,260     5.14Sun Note Co.         25,854,099     25,693,399     99.38North Sea Sun Oil*25  Co.     7,681,288     7,541,569     98.18              __________     __________              73,818,972     54,658,298                       Apportioned              Interest      to foreign    Ratio   1986           expense     source income   percent   ____           ________     _____________   _______Kee Leasing Co.       $ 213,410       $ 27,604    12.93666 Leasing Co.       3,907,731      1,750,664    44.80670 Leasing Co.       1,468,580       621,944    42.35650 Leasing Co.        404,732       189,415    46.80Sun Leasing Co.       4,532,004      1,960,092    43.25Millcreek Leasing Co.     435,448       102,064*26     23.44Tropic Sun Shipping      644,829       242,814    37.66*187  Sun Transport, Inc.     2,356,829       650,044    27.58Sunoco Overseas, Inc.     211.438       211,438    100.00Sun Refining & Mktg. Co.  44,588,973      4,598,484    10.31Sun Oil Trading Co.      549,406        8,918     1.62Sun Co., Inc.       157,687,537      5,097,677     3.23Sun Oil Intl.        7,190,703      2,487,983    34.60North Sea Sun Oil Co.    28,050,064      27,208,562    97.00Claymont Investment Co.  217,180,793        47,426     0.02             ___________      __________             469,422,477      45,205,129The 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 Treas. Reg. 1.861-8(e)(2)(vi)." The stipulation*27  does not state which of the optional gross income methods described by sec. 1.861-8(e)(2)(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  1982         Gross income   gross income     percent  ____         ____________   ____________     _______650 Leasing Co.      $ 3,288,110   $ 1,221,496      37.15Sun Leasing Co.       6,872,415    3,966,133      57.71666 Leasing Co.       6,401,918    3,372,797      52.68670 Leasing Co.       4,733,818    2,214,708      46.78673 Leasing Co.       4,308,780    1,924,955      44.68675 Leasing Co.       3,987,511    2,016,544      50.57652 Leasing*28  Co.       3,183,942    1,420,014      44.60Kee Leasing Co.       1,720,403    1,194,921      69.46653 Leasing Co.       3,209,671    1,576,737      49.12667 Leasing Co.       7,577,559    3,950,760      52.14Millcreek Leasing Co.    6,775,203    1,652,111      24.38*188  DeSun Shipping       1,868,480    1,321,135      70.71Eastern Sun Shipping     340,725     222,010      65.16NY Sun Shipping       8,302,978    6,755,590      81.36NJ Sun Shipping       -814,965     575,083     -70.57PA Shipping         3,912,021    2,468,565      63.10Phil Sun Shipping      6,602,489    1,963,223      29.73Western Sun Shipping    2,574,519    1,646,584      63.96Sun Transport, Inc.    95,328,918    38,274,373      40.15Sun Note Co.        43,260,421    41,406,722      95.72North Sea Oil Co.     42,518,569    42,518,569     100.00Totem Ocean Trailer    92,031,992    57,380,743*29       62.35            ___________   ___________            347,985,477   219,043,773                     Foreign      Ratio  1983         Gross income   gross income     percent  ____         ____________   ____________     _______650 Leasing Co.      $ 2,593,100   $ 1,508,054      58.16Sun Leasing Co.       6,973,146    4,151,644      59.54666 Leasing Co.       8,943,399    5,644,013      63.11670 Leasing Co.       4,132,347    2,304,872      55.78652 Leasing Co.       2,523,829    1,104,364      43.76Kee Leasing Co.       2,012,673    1,424,195      70.76653 Leasing Co.       2,552,479    1,306,385      51.18667 Leasing Co.       6,427,811    4,098,914      63.77Millcreek Leasing Co.    8,220,982    4,050,674      49.27NY Sun Shipping       7,917,134    6,891,523      87.05NJ Sun Shipping  *30       3,008,541    1,868,808      62.12Phil Sun Shipping      6,930,169    2,228,559      32.16Texas Sun Shipping     1,392,393     525,539      37.74Tropic Sun Shipping     3,047,355    1,750,507      57.44Sun Transport, Inc.    85,157,516    29,842,158      35.04Heleasco Fifteen      2,415,666    2,168,805      89.78Sun Note Co.        44,530,627    42,711,487      95.91            ___________   ___________            198,779,167   113,580,501                     Foreign      Ratio  1984         Gross income   gross income     percent  ____         ____________   ____________     _______Kee Leasing Co.      $ 2,014,039    $ 761,330      37.80666 Leasing Co.       8,573,805    4,137,017      48.25670 Leasing Co.       4,362,352    1,586,209      36.36*189  650 Leasing Co.       2,657,644    1,339,771*31       50.41652 Leasing Co.       2,557,004     731,691      28.62653 Leasing Co.       2,592,171     483,157      18.64667 Leasing Co.       6,563,855    1,936,224      20.50Sun Leasing Co.       7,404,599    3,269,459      44.15NY Sun Shipping       9,454,505    8,921,975      94.37Phil Sun Shipping      5,129,727    2,278,684      44.42Tropic Sun Shipping     4,004,764    1,948,117      48.64Sun Transport, Inc.    73,123,906    23,311,476      31.88Sun Oil Trading Co.    20,037,455     710,113      3.54Sun Note Co.        40,344,826    40,094,056      99.38North Sea Sun Oil Co.   23,924,318    17,319,539      72.39            ___________   ___________            212,744,970   108,828,818                     Foreign      Ratio   1986         Gross income   gross income     percent   ____    *32       ____________   ____________     _______Kee Leasing Co.       $ 2,013,346    $ 260,455      12.94666 Leasing Co.        7,082,756    3,172,987      44.80670 Leasing Co.        3,533,401    1,496,424      42.35650 Leasing Co.        2,038,955     954,294      46.80Sun Leasing Co.        6,194,365    2,679,882      43.26Millcreek Leasing Co.      305,752     -83,676      27.37Tropic Sun Shipping      3,986,919    1,501,298      37.66Sun Transport, Inc.     79,520,790   21,932,881      27.58Sunoco Overseas, Inc.     -108,199     290,314     100.00Sun Refining & Mktg. Co.  672,597,605    1,095,517      0.16Sun Oil Trading Co.     13,481,454    4,673,000      34.66Sun Co., Inc.        760,884,991   23,864,572      3.14Sun Oil Intl.        10,593,916    6,769,393      34.55North Sea Sun Oil Co.    36,565,327   36,394.917      99.53Claymont Investment Co.   513,112,873    *33  111,203      00.02            _____________   ___________            2,120,804,251   105,113,461In allocating and apportioning each member's interest expense to sources without the United States under one of the optional gross income methods described by section 1.861-8(e)(2)(vi), Income Tax Regs., petitioner started with the gross amount of each member's interest expense for the *190  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 section 901(a) in computing the tax liability of its affiliated group of corporations for consolidated return years 1982, 1983, 1984, and 1986. 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 section 904. Under that limitation, the amount of foreign tax credit could not exceed the tentative U.S. tax for the year (i.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*34  without the United States and the denominator of which is the entire taxable income. Sec. 904(a).Generally, in the case of an affiliated group of corporations, the foreign tax credit is determined on a consolidated basis.  Sec. 1.1502-4(c), Income Tax Regs. In computing the overall limitation under section 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(d)(1), Income Tax Regs. The denominator of the limiting fraction under section 904(a) is the consolidated taxable income of the group computed in accordance with section 1.1502-11, Income Tax Regs.Sec. 1.1502-4(d)(2), 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(a). The total of those amounts is the numerator of the limiting fraction under*35 section 904(a).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 section 1.861-8(e)(2)(v), Income Tax Regs., for tax years 1982, 1983, and 1984, and using one of the optional gross income methods described by section 1.861-8(e)(2)(vi), Income Tax Regs., for tax year 1986. As mentioned above, *191  petitioner had used one of the optional gross income methods described by section 1.861- 8(e)(2)(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 1986 return use one of the optional gross income methods described by section 1.861-8(e)(2)(vi), Income Tax Regs.The second change sought by petitioner, the change at the heart of the instant controversy, involves petitioner's assertion*36  that each member's interest expense to be allocated and apportioned under section 1.861-8(e)(2), Income Tax Regs., for purposes of computing the overall limitation under section 904(a), is "net interest expense", i.e., 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; i.e., interest expense less interest income but not less than zero:               Interest    Interest    Net interest   1982           expense     income      expense   ____           ________    ________    ____________650 Leasing Co.        $ 682,931   $ 1,379,522      -0-Sun Leasing Co.        4,729,086    1,512,776   $ 3,216,310666 Leasing Co.        4,072,539  *37    1,904,855     2,167,684670 Leasing Co.        1,830,136    1,740,970      89,166673 Leasing Co.        1,627,381    1,253,296      374,085675 Leasing Co.        1,983,276     836,661     1,146,615652 Leasing Co.         794,330    1,285,273      -0-Kee Leasing Co.         581,235      13,373      567,862653 Leasing Co.         814,727    1,309,988      -0-667 Leasing Co.        3,286,585    2,639,109      647,476Millcreek Leasing Co.      830,407    1,357,133      -0-DeSun Shipping          47,658     135,470      -0-Eastern Sun Shipping       37,115      82,228      -0-NY Sun Shipping        9,970,340     854,008     9,116,332NJ Sun Shipping         143,340      16,205      127,135PA Shipping           46,423     133,771      -0-Phil Sun Shipping      10,809,958     448,677    10,361,281Western*38  Sun Shipping       50,003      66,869      -0-Sun Transport Inc.      3,650,045      99,840     3,550,205Sun Note Co.         31,066,253    32,754,418      -0-North Sea Oil Co.        65,897    1,176,482      -0-*192  Totem Ocean Trailer       46,949    1,668,617      -0-              __________    __________    __________              77,166,614    52,669,541    31,364,151               Interest    Interest    Net interest   1983           expense     income      expense   ____           ________    ________    ____________650 Leasing Co.        $ 612,220    $ 684,172      -0-Sun Leasing Co.        4,736,241    1,581,401   $ 3,154,840666 Leasing Co.        4,084,197    1,707,485    2,376,712670 Leasing Co.        1,756,214    1,139,007     617,207652 Leasing Co.        *39   714,282     631,498      82,784Kee Leasing Co.         504,412      6,765     497,647653 Leasing Co.         736,315     658,732      77,583667 Leasing Co.        3,160,356    1,489,361    1,670,995MillCreek Leasing Co.      742,214    2,132,982      -0-NY Sun Shipping        9,849,306     727,159    9,122,147NJ Sun Shipping         208,102     449,738      -0-Philadelphia Sun Shipping   10,688,995     855,141    9,833,854Texas Sun Shipping        33,963     704,193      -0-Tropic Sun Shipping       474,700     569,955      -0-Sun Transport, Inc.      2,644,781     980,197    1,664,584Heleasco Fifteen        1,444,639     246,861    1,197,778Sun Note Co.         25,667,812   37,161,016      -0-              __________   __________    __________              68,058,749   51,725,663    30,296,131   *40              Interest    Interest    Net interest   1984           expense     income      expense   ____           ________    ________    ____________Kee Leasing Co.        $ 408,197    $ 10,538    $ 397,659666 Leasing Co.        4,083,327    2,209,163    1,874,164670 Leasing Co.        1,669,360    1,369,504     299,856650 Leasing Co.         536,038     715,947      -0-652 Leasing Co.         613,066     671,202      -0-653 Leasing Co.         636,635     704,840      -0-667 Leasing Co.        3,018,359    1,611,875     1,406,484Sun Leasing Co.        4,689,864    2,044,830     2,645,034NY Sun Shipping        9,712,823     532,530     9,180,293Phil Sun Shipping      10,551,646     676,120     9,875,526Tropic Sun Shipping       644,883    1,040,764      -0-Sun Transport, Inc.      3,091,754     35,223   *41    3,056,531Sun Oil Trading Co.      12,114,469    16,303,956      -0-Sun Note Co.         25,854,099   33,533,894      -0-*193  North Sea Oil Co.       7,681,288    2,196,279     5,485,009              __________   __________    __________              75,305,808   63,656,665    34,220,556               Interest    Interest    Net interest   1986           expense     income      expense   ____           ________    ________    ____________Kee Leasing Co.        $ 213,410     $ 9,844     $ 203,566666 Leasing Co.        3,907,731     736,783     3,170,948670 Leasing Co.        1,468,580     540,553      928,027650 Leasing Co.         404,732     130,367*42       274,365Sun Leasing Co.        4,532,004     834,601     3,697,403Millcreek Leasing Co.      435,448     662,752       -0-Tropic Sun Shipping       644,829    1,148,919       -0-Sun Transport, Inc.      2,356,829     646,275     1,710,554Sunoco Overseas, Inc.      211,438     189,663      21,775Sun Refining & Mkt., Inc.  44,588,973    23,675,379    20,913,594Sun Oil Trading Co.       549,406     317,610      231,796Sun Co., Inc.        157,687,537     937,176    156,750,361Sun Oil Int.         7,190,703    12,824,523       -0-North Sea Oil Co.      28,050,064    1,784,106    26,265,958Claymont Investment Co.   217,180,793   505,319,941       -0-             ___________   ___________    ___________             469,422,477   549,758,492    214,168,347Petitioner argues that it is entitled to use the amount in column three of the above schedule, i.e., the net interest*43  expense of each member of its affiliated group, as the starting point for allocating and apportioning that member's interest expense under section 1.861- 8(e)(2), *194  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 1982, 1983, and 1984 is apportioned to sources without the United States in accordance with the asset method described by section 1.861- 8(e)(2)(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. 1.861-8(e)(2)(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*44  net interest expense.In the appendix, each member's interest expense for 1986 is apportioned to sources without the United States in accordance with one of the optional gross income methods described by section 1.861-8(e)(2)(vi), Income Tax Regs. Generally, under that provision, assuming certain conditions are met, the deduction for interest is 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 1986, one set to be used assuming that netting is not permitted and the other set to be used assuming that netting is 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 1986, one schedule summarizing the apportionment of gross interest (i.e., no netting) and one summarizing the apportionment of net*45  interest (i.e., netting).It appears that in computing the second set of gross income ratios for 1986, 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 12.94 percent, the ratio *195  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, $ 260,455, by the company's gross income, $ 2,013,345. On the other hand, the second income ratio of 13 percent, the ratio to be used in apportioning interest if netting is permitted, was computed after the amount of netted interest income, $ 9,844, was subtracted from the company's gross income, the denominator of the fraction. Thus, the second ratio of 13 percent was computed by dividing $ 260,455, the company's gross income from sources without the United States, by $ 2,003,501, the company's total gross income less the amount of netted interest ($ 2,013,345 minus $ 9,844).Similar adjustments were made to the gross income of each of the*46  other 14 members of petitioner's affiliated group for purposes of computing the second gross income ratio; i.e., 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 15 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 1986, $ 1,784,106, was subtracted from the company's foreign source gross income, $ 36,394,917, to arrive at $ 34,610,811, the numerator of the fraction. That amount was divided by the excess of the company's total gross income, $ 36,565,327, over its interest income, $ 1,784,106, or $ 34,781,221, to arrive at the gross income ratio of 99.51 percent.Thus, in computing the second gross income ratio for North Sea Sun Oil Co. under section 1.861-8(e)(2)(vi), Income Tax Regs., the ratio to be used if netting is permitted, the interest income earned by North Sea Sun Oil Co. during 1986 was subtracted from both the numerator*47  and the denominator of the fraction. The interest income earned during 1986 by each of the other 14 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 1986 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 1986 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 *196  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*48  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 StatesYear    Per return    No netting    Netting     Difference____    __________    __________    _______     __________1982   $ 55,704,104   $ 55,155,126  $ 17,444,643   $ 37,710,4831983    50,434,920    47,362,922   17,200,130    30,162,7921984    54,658,298    50,150,909   19,831,268    30,319,6411986    45,205,129    45,517,890   37,689,610    7,828,280     ___________   ___________   __________   ___________     206,002,451   198,186,847   92,165,651   106,021,196Thus, 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 section 904(a) would be substantially*49  less for each of the 4 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 $ 37,710,483, $ 30,162,792, $ 30,319,641, and $ 7,828,280, 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 section 904(a), 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 sections 861 through 864, especially section 1.861- 8(e)(2), Income Tax Regs., to support their position that netting is permitted or that netting is not permitted. Petitioner does not contend that the regulations are contrary *197  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 sections 861 through 864, principally section 1.861-8(e)(2), Income Tax Regs., that were*50  in effect during the years 1982, 1983, 1983, and 1986, generally referred to herein as the subject regulations.At the outset, we note that the principal regulation at issue in this case, section 1.861-8(e)(2), Income Tax Regs., was adopted on January 3, 1977, effective for taxable years beginning after December 31, 1976 (hereinafter referred to as the 1977 Regulation).  42 Fed. Reg. 1197 (Jan. 6, 1977).In 1988, 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, Pub. L. 99-514, sec. 1215, 100 Stat. 2544.  Section 1.861-9T(a), Temporary Income Tax Regs., 53 Fed. Reg. 35477 (Sept. 14, 1988), superseded the 1977 regulation for years beginning after December 31, 1986. Section 1.861-9T(a) contains virtually the same language found in section 1.861-8(e)(2)(i) and (ii) regarding the allocations and apportionment of interest expenses. *51  In addition, section 1.861-9T(a), 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 1988 temporary regulation explicitly prohibits netting for tax years beginning after December 31, 1986. The 1988 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(h), Temporary Income Tax Regs., 53 Fed. Reg. 35477 (Sept. 14, 1988).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 1988 temporary regulations, including section 1.861-9T(a), Temporary Income Tax Regs., supra, were promulgated to *198  reflect the revisions made by the Tax Reform Act of 1986, including the enactment*52  of section 864(e), 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 December 31, 1986. Tax Reform Act of 1986, Pub. L. 99-514, sec. 1215(c)(1), 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 section 1.861-9T(a), 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(f)(1), Income Tax Regs. The overall limitation on the foreign tax credit provided in section 904(a) is one such operative section. See id.Under the subject regulations, the first*53  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(a)(1), (2), (4), 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(a)(4), 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 section 904(a), the operative section in this case, requires the taxpayer to determine taxable income from sources without the United 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(a)(4), (f)(1), Income Tax Regs.The term "gross income from sources without the United States", the statutory grouping of gross income in this case, *199  consists of*54  those items of gross income specified in section 862(a), plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a).  Sec. 1.861-1(a)(2), 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 section 861(a), plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a).  Sec. 1.861-1(a)(1), Income Tax Regs.For example, in the case of interest income, section 861(a)(1) 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(a), Income Tax Regs.Section 862(a)(1) 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(a)(1)(i), Income Tax Regs.The record in the instant case does not*55  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 section 904(a) 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 1986, 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*56  "expenses, losses, and other deductions" to each of the groupings of gross income. *200 Sec. 1.861-8(a)(2), (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 secs. 861(b), 862(b); secs. 1.861-1, 1.861-8(a)(1), 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(a), (b), (c), and (d), Income Tax Regs., as well as rules governing the allocation and apportionment of specific deductions, see sec. 1.861-8(e)(2) through (11), Income Tax Regs. Specific rules for the allocation and apportionment of interest expense are provided in section 1.861-8(e), Income Tax Regs.The principal rule of general applicability is that a taxpayer's expenses, losses, and other deductions are to be allocated*57  to the "class of gross income" to which each deduction is "definitely related". Sec. 1.861-8(a)(3), (b)(1), 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. 1.861-8(b)(1) and (2), 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(b)(1), Income Tax Regs. They may consist of one or more items of gross income enumerated in section 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(a)(3), (b)(1), 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*58  apportioned "by attributing the deduction to gross income (within the class to which the deduction has been allocated) which is in the statutory *201  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(c)(1), 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*59  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(b)(5), (c)(2), 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 section 1.861-8(e)(2), Income Tax Regs. The regulations describe this approach as follows:     (2) Interest -- (i) In general. The method of allocation   and apportionment for interest set forth in this paragraph *60    (e)(2) 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 *202  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 section 882(c), see sec. 1.882-5. [Sec.   1.861-8(e)(2)(i), Income Tax Regs.]This is the provision of the regulations on which petitioner principally relies, sec. 1.861-8(e)(2)(i), Income Tax Regs.*61  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(e)(2)(ii), Income Tax Regs.]After stating the general rule in section 1.861- 8(e)(2)(i), 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(e)(2)(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(e)(2)(v), Income Tax Regs.*62  This is the method that petitioner wishes to use for tax years 1982, 1983, and 1984, 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(e)(2)(vi), Income Tax Regs. This is the method that petitioner wishes to use for tax year 1986, 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(e)(2) (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 *203  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) *63  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. 1.861-8(e)(2)(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 secs. 1.861-2 through 1.861-7, Income Tax Regs., and the interest deduction is directly allocated to such gross income, see sec. 1.861- 8(e)(2)(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(b)(5), (c)(2), 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*64  each grouping, see sec. 1.861-8(e)(2)(iii), Income Tax Regs.Petitioner argues that, under the version of the section 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 section 904(a). Petitioner's position is based on its reading of section 1.861-8(e)(2)(i), Income Tax Regs., which is quoted above. Petitioner emphasizes that section 1.861-8(e)(2)(i), 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" *204  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*65  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; i.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 $ 800,000, and has $ 1 million   in short-term instruments bearing interest at 10 percent per   year, and the capacity to borrow funds with no fees and at 10   percent per year. The business can obtain the $ 800,000 by   reducing its holding of short-term interest bearing instruments   or by borrowing. Either choice has exactly the same effect on   the net income of the business. If the business borrows,   interest expense will increase by $ 80,000 per year; if the   business*66  sells the instruments, interest income will decrease by  $ 80,000 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 section 1.861- 8(e)(2)(i), Income Tax Regs., to mean net interest:   Suppose business A has an immediate need of $ 800,000 and   uncertain future needs, and a line of credit of $ 1 million at 10   percent, and immediately draws $ 800,000 on the line of credit.   The interest expenses on the $ 800,000 would be $ 80,000, rather   than $ 100,000. In contrast, business B has a substantially *67    identical need of $ 800,000 immediately and uncertain future   needs, but has no line of credit. So, business B obtains a loan   from *205  a bank for $ 1 million and invests the surplus $ 200,000 in   short-term instruments bearing 10 percent. Although business B's   gross interest expense would be $ 100,000, its cost of borrowing   would be best described as $ 80,000 ($  100,000-$  20,000).Petitioner argues that in the context of section 1.861-8(e)(2), 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 Bowater, Inc., & Subs. v. Commissioner, 101 T.C. 207">101 T.C. 207 (1993), revd.  108 F.3d 12">108 F.3d 12 (2d Cir. 1997), involving the same issue, via, whether a taxpayer may offset interest income and interest expense in determining the amount of the interest deduction to be allocated and*68  apportioned under section 1.861-8(e)(2), 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 qualified 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 section 1.861-8, Income Tax Regs.Sec. 1.994-1(c)(6)(iii), 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 section 1.861-8(e)(2), 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, Coca Cola Co. v. Commissioner, 106 T.C. 1">106 T.C. 1, 6 (1996), and Computervision Intl. Corp. v. Commissioner, T.C. Memo. 1996-131, vacated*69  and remanded 164 F.3d 73">164 F.3d 73 (1st Cir. 1999). 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 Bowater, Inc., & Subs. v. Commissioner, 108 F.3d 12">108 F.3d 12 (2d Cir. 1997).*206  Respondent argues that the subject regulations are not ambiguous. To the contrary, respondent states that the "plain language of the Regulations" promulgated under section 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 (1) and (24) of section 1.861-8(g), Income Tax Regs., in which "'gross' interest expense, i. e., without reduction for interest income, [is 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*70  argues that petitioner's position ignores the fact that the regulations promulgated under section 861 apportion "deductions" which, in the case of interest expenses means the amount deductible under section 163. In this connection, respondent points out that section 1.861-8(a)(2), 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 Treas. Reg. 1.861-8 than elsewhere in the Internal Revenue Code."We disagree with petitioner that the language of section 1.861-8(e)(2)(i), 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 section 1.861-8(e)(2), Income Tax Regs., to refer to "net interest expense." In our view, the allocation and apportionment of net interest expense under section 1.861-8(e)(2), Income Tax Regs., is not permitted*71  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 section 1.861- 8(e)(2)(i), 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 section 1.861-8(a), (b), and (c), Income Tax Regs., are based on the *207  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(a), (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(e)(2)(i) and (ii), Income*72  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(e)(2)(i), Income Tax Regs. Thus, the regulations use the phrase "money is fungible" in section 1.861-8(e)(2)(i), 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 $ 800,000, gross operating income from foreign sales of $ 500,000, operating expenses of $ 300,000 attributable to domestic sales, and operating expenses of $ 200,000 attributable to foreign sales. Assume further that, *73  during the same year, the taxpayer realized interest income from U.S. sources of $ 200,000 and interest expense of $ 375,000. 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 *208  of each to the taxpayer's entire taxable income, as contemplated by section 904(a), are shown in the following schedule:No netting        Total    U.S. source    Foreign source__________        _____    ___________    ______________Gross income Operating income   $ 1,300,000    $ 800,000     $ 500,000 Interest income     200,000     200,000       -0-           __________    _________      ________  Total        1,500,000    1,000,000      500,000Gross income ratio*74       100%     66.67%       33.33%Expenses Operating expenses    500,000     300,000      200,000 Interest expense     375,000     250,000      125,000             _______     _______      _______  Total          75,000     550,000      325,000Taxable income       25,000     450,000      175,000Section 904(a) ratio     100%       72%        28%Petitioner's position, is that section 1.861-8(e)(2) (i), Income Tax Regs., permits a taxpayer to offset interest expense with interest income before "net interest expense" is allocated and apportioned under section 1.861-8(e)(2), 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 section 904(a), are shown*75  in the following schedule:  With netting      Total    U.S. source   Foreign source  ____________      _____    ___________   ______________Gross income Operating income   $ 1,300,000   $ 800,000     $ 500,000 Interest income      -0-       -0-        -0-           __________    ________     ________  Total        1,300,000    800,000      500,000Gross income ratio      100%     61.54%      38.46%Expenses Operating expenses    500,000    300,000      200,000 Interest expense     175,000    107,692      67,308             _______    ________     ________  Total         675,000    407,692      267,308*209  Taxable income       625,000    392,308      232,692Sec. 904(a) ratio       100%    62.7692%     37.2308%Thus, in this example, the netting of interest expense and interest income has the effect of increasing, from 28 percent to 37.23 percent, the proportion*76  of the taxpayer's taxable income, $ 625,000, that is attributable to foreign sources.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, i.e., $ 625,000 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 (i.e., foreign source) and the residual grouping (i.e., United States source) under section 1.861-8(e)(2), Income Tax Regs. Accordingly, the aggregate deductions used in the netting computation are less than actual aggregate deductions. Thus, taxpayer's taxable income, i.e., the difference between the gross income in both groupings and the aggregate expenses allocated and apportioned thereto, will be overstated, unless the taxpayer's total gross income is reduced by the amount of interest income that was offset.Continuing the above example, if interest expense and interest income are netted for purposes of allocating interest expenses but*77  the amount of interest income offset by netting is not removed from the taxpayer's gross income, then the computation contemplated by section 904(a) would be as follows:                      Foreign  With netting     Total   U.S. source   source  ____________     _____   ___________  _______Gross income Operating income $ 1,300,000  $ 800,000  $ 500,000 Interest income    200,000   200,000    -0-          __________  _________   ________  Total       1,500,000  1,000,000   500,000Gross income ratio     100%    66.67%    33.33%Expenses Operating expenses  500,000   300,000   200,000 *210  Interest expense   175,000   116,667    58,333  Total        675,000   416,667   258,333Taxable income     825,000   583,333   241,667Sec. 904(a) ratio     1132%   193.3333%   138.6667%*78  Thus, as illustrated above, if the taxpayer's gross income is not reduced, then the taxpayer's taxable income, $ 625,000, would be overstated by the amount of the interest income that is offset by interest expense, $ 200,000, and the section 904(a) ratio would not be based upon the taxpayer's "entire taxable income for the same taxable year". Sec. 904(a). This raises a question about where in the regulations is there authority to reduce "gross income" by the amount of netted interest.Second, an equally important consequence of netting is the fact that it increases the ratio under section 904(a), and thus increases the amount of foreign tax credit, only to the extent that the interest income that is absorbed by interest expense in the netting process is from U.S. sources. To the extent that a relatively greater amount of the interest income absorbed in the netting process is from foreign sources, then netting produces a lower ratio under section 904(a) than not netting.In the above example, we assumed that all of the interest income, $ 200,000, was from U.S. sources. In that case, the section 904(a) ratio computed without netting was 28 percent but was increased to 37.23 percent*79  by netting. On the other hand, if we assume that the interest income is entirely from foreign sources, then the section 904(a) ratio, without netting, is 52 percent, computed as follows:No netting        Total     U.S. source    Foreign source__________        _____     ___________    ______________Gross income Operating income   $ 1,300,000    $ 800,000     $ 500,000 Interest income     200,000      -0-        200,000           __________     ________      ________    Total       1,500,000     800,000      700,000Gross income ratio      100%      53.33%       46.67%*211  ExpensesOperating expenses    500,000     300,000      200,000Interest expense     375,000     200,000      175,000             _______     _______      _______   Total         875,000     500,000      375,000Taxable income       625,000     300,000      325,000Sec. 904(a)*80  ratio       100%       48%        52%If interest expense and interest income are netted, however, the ratio is reduced to 37.23 percent. Thus, even though the taxpayer received all of his interest income from foreign sources under the regulations dealing with interest income, sec. 1.861-2, Income Tax Regs., netting disregards the source of the interest income that is absorbed by interest expenses and causes the taxpayer to obtain the same foreign tax credit as another taxpayer who realized interest income entirely from U.S. sources. This example demonstrates that the netting of interest expense and interest income which petitioner argues arises from section 1.861-8(e)(2)(i), Income Tax Regs., fails to take into account the source of the interest income, and it causes interest income from entirely different sources to be treated the same.In our view, petitioner's position that it "may allocate and apportion net, rather than gross, interest expense under section 1.861-8(e)(2), Income Tax Regs." is foreclosed by the language of that regulation. Section 1.861-8(e)(2)(ii), Income Tax Regs.*81  , 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, section 1.861-8(e)(2)(ii), Income Tax Regs., thus directs that the gross amount of the taxpayer's interest deductions, i.e., the aggregate of deductions for interest, be allocated to all of the taxpayer's gross income. In effect, section 1.861-8(e)(2)(ii), Income Tax Regs., forecloses petitioner's position that net interest expense, i.e., less than "the aggregate of deduction for interest", can be allocated to less than "all of the taxpayer's gross income", i.e., 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 *212  by sections 861(a)(1), 862(a)(1), and the regulations promulgated thereunder, including sections 1.861-2(a) and 1.862-1(a), Income Tax Regs. Those provisions define "gross income from sources within the United States" and "gross income from sources without the United States" to*82  include all of the interest income earned by the taxpayer during the taxable year. Secs. 1.861-2(a), 1.862-1(a), Income Tax Regs. In computing gross income from sources within and without the United States, neither the statute nor the regulations contemplate that the portion of the taxpayer's gross income consisting of interest income for the year will be reduced or entirely offset by interest expenses.As shown in the hypothetical example discussed above, such a reduction of the amount of the taxpayer's gross income would be necessary in a netting computation. Otherwise, the computation would overstate the taxpayer's taxable income for the year by the interest income that is offset by interest expense. The adjustment to gross income that would be necessary is depicted in the computation set forth in the hypothetical discussed above. It is similar to the adjustment that the parties made in computing the taxpayer's interest expense for 1986 as shown in the appendix.Moreover, petitioner's position that it is entitled to allocate net interest expense under section 1.861-8(e)(2), Income Tax Regs., means that the taxpayer's interest income, to the extent that*83  it is offset by interest expense, is not included in the groupings of gross income, i.e. gross income from sources within and without the United States, contrary to sections 861(a)(1) and 862(a)(1). Sec. 861(a)(1). 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.*213  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*84  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 1977 Regulations, in Bowater, Inc., & Subs. v. Commissioner, 101 T.C. 207">101 T.C. 207 (1993). In light of the opinion of the U.S. Court of Appeals for the Second Circuit reversing our opinion in Bowater, Inc., it is 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 Dresser Indus., Inc. v. United States, 238 F.3d 603">238 F.3d 603 (5th Cir. 2001),*85  in which that court holds that interest netting is not permitted under section 1.861- 8(e)(2), 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 1977 regulation, Dresser Indus., Inc. v. Commissioner, 911 F.2d 1128">911 F.2d 1128 (5th Cir. 1990), revg.  92 T.C. 1276">92 T.C. 1276 (1989). 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, section 1.861-8(e)(2), Income Tax Regs., does not permit the netting of interest income and interest expense. In light of that, we hereby overrule our opinion in Bowater, Inc., & Subs. v. Commissioner, 101 T.C. 207">101 T.C. 207 (1993).*214  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*86  this opinion.                Appendix 1982           Interest    Net interest   Asset ratio              expense     expense     percent             ________    ____________   ___________650 Leasing Co.      $ 682,931      -0-       34.34Sun Leasing Co.      4,729,086    $ 3,216,310     64.81666 Leasing Co.      4,072,539     2,167,684     64.98670 Leasing Co.      1,830,136      89,166     69.96673 Leasing Co.      1,627,381      374,085     55.98675 Leasing Co.      1,983,276     1,146,615     60.65652 Leasing Co.       794,330      -0-       73.42Kee Leasing Co.       581,235      567,862     44.47653 Leasing Co.       814,727      -0-       89.11667 Leasing Co.      3,286,585      647,476     80.00Millcreek Leasing Co.    830,407      -0-       4.26De Sun*87  Shipping        47,658      -0-       0.58Eastern Sun Shipping     37,115      -0-       0.51NY Sun Shipping      9,970,340     9,116,332     90.23NJ Sun Shipping       143,340      127,135      3.76PA Shipping          46,423      -0-       2.70Phil Sun Shipping     10,809,958    10,361,281     29.54Western Sun Shipping     50,003      -0-       0.00Sun Transport, Inc.    3,650,045     3,550,205     25.99Sun Note Co.       31,066,253      -0-       91.39North Sea Oil Co.       65,897      -0-       34.77Totem Ocean Trailer      46,949      -0-       49.39            __________    __________ Total          77,166,614    31,364,151             [table continued]             Interest apportioned to foreign                  source income*88                    _____________               No netting      Netting650 Leasing Co.         $ 234,519       -0-Sun Leasing Co.         3,064,921    $ 2,084,491666 Leasing Co.         2,646,336     1,408,561670 Leasing Co.         1,280,363       62,381673 Leasing Co.          911,008      209,413675 Leasing Co.         1,202,857      695,422652 Leasing Co.          583,197       -0-Kee Leasing Co.          258,475      252,528653 Leasing Co.          726,003       -0-667 Leasing Co.         2,629,268      517,981Millcreek Leasing Co.       35,375       -0-De Sun Shipping            276       -0-Eastern Sun Shipping         189       -0-NY Sun Shipping         8,996,238     8,225,666NJ Sun Shipping           5,390       4,780PA Shipping  *89             1,253       -0-Phil Sun Shipping        3,193,262     3,060,722Western Sun Shipping        -0-        -0-Sun Transport, Inc.        948,647      922,698Sun Note Co.          28,391,449       -0-North Sea Oil Co.         22,912       -0-Totem Ocean Trailer        23,188       -0-               __________     __________ Total            55,155,126     17,444,643 1983           Interest    Net interest   Asset ratio              expense     expense     percent             ________    ____________   ___________650 Leasing Co.       $ 612,220      -0-      27.22Sun Leasing Co.       4,736,241   $ 3,154,840     63.17666 Leasing Co.       4,084,197    2,376,712     53.36670 Leasing Co.       1,756,214     617,207     71.74672 Leasing Co.       *90  714,282      82,784     57.18Kee Leasing Co.        504,412     497,647     43.41653 Leasing Co.        736,315      77,583     67.56667 Leasing Co.       3,160,356    1,670,995     83.00*215  Millcreek Leasing Co.     742,214     -0-       5.85NY Sun Shipping       9,849,306    9,122,147     83.33NJ Sun Shipping Co.      208,102     -0-       1.97Phil Sun Shipping     10,688,995    9,833,854     29.29Texas Sun Shipping       33,963     -0-       4.56Tropic Sun Shipping      474,700     -0-       27.47Sun Transport, Inc.     2,644,781    1,664,584     20.58Heleasco Fifteen      1,444,639    1,197,778     80.91Sun Note Co.        25,667,812     -0-       92.67             __________    __________Total           68,058,749    30,296,131             [table continued]             Interest*91  apportioned to foreign                  source income                  _____________               No netting      Netting650 Leasing Co.         $ 166,646       -0-Sun Leasing Co.         2,991,883    $ 1,992,912666 Leasing Co.         2,179,328     1,268,214670 Leasing Co.         1,259,908      442,784672 Leasing Co.          408,426       47,336Kee Leasing Co.          218,965      216,029653 Leasing Co.          497,454       52,415667 Leasing Co.         2,623,095     1,386,926Millcreek Leasing Co.       43,420       -0-NY Sun Shipping         8,207,427     7,601,485NJ Sun Shipping Co.         4,100       -0-Phil Sun Shipping        3,130,807     2,880,336Texas Sun Shipping         1,549       -0-Tropic Sun Shipping        130,400       -0-Sun*92  Transport, Inc.        544,296      342,571Heleasco Fifteen        1,168,857      969,122Sun Note Co.          23,786,361       -0-               __________     __________Total             47,362,922     17,200,130 1984           Interest    Net interest   Asset ratio              expense     expense     percent             ________    ____________   ___________Kee Leasing Co.      $ 408,197     $ 397,659     17.77666 Leasing Co.      4,083,327     1,874,164     33.48670 Leasing Co.      1,669,360      299,856     48.22650 Leasing Co.       536,038      -0-       6.90652 Leasing Co.       613,066      -0-       38.08653 Leasing Co.       636,635      -0-       25.12667 Leasing Co.      3,018,359     1,406,484     37.98Sun Leasing Co.      4,689,864   *93    2,645,034     44.68NY Sun Shipping      9,712,823     9,180,293     86.91Phil Sun Shipping     10,551,646     9,875,526     35.37Tropic Sun Shipping     644,883      -0-       12.02Sun Transport, Inc.    3,091,754     3,056,531     16.87Sun Oil Trading Co.     1627,633      -0-       0.00Sun Note Co.       25,854,099      -0-       93.06North Sea Sun OilCo.            7,681,288     5,485,009     96.36            __________    __________Total          73,818,972    34,220,556             [table continued]             Interest apportioned to foreign                  source income                  _____________               No netting      NettingKee Leasing Co.         $ 72,537      $ 70,664666 Leasing Co.        *94  1,367,098       627,470670 Leasing Co.          804,965       144,591650 Leasing Co.          36,987        -0-652 Leasing Co.          233,456        -0-653 Leasing Co.          159,923        -0-667 Leasing Co.         1,146,373       534,183Sun Leasing Co.         2,095,431      1,181,801NY Sun Shipping         8,441,414      7,978,593Phil Sun Shipping        3,732,117      3,492,974Tropic Sun Shipping        77,515        -0-Sun Transport, Inc.        521,579       515,637Sun Oil Trading Co.         -0-        -0-Sun Note Co.          24,059,825       -0-North Sea Sun OilCo.               7,401,689     5,285,355               __________     __________Total             50,150,909     19,831,268*216 *95   1986 No netting                         Asset             Gross          ratio     Interest             income   Foreign GI   percent     expense             ______   __________   _______     ________Kee Leasing Co.     $ 2,013,346   $ 260,455    4.71     $ 213,410666 Leasing Co.      7,082,756   3,172,987    18.63     3,907,731670 Leasing Co.      3,533,401   1,496,424    42.66     1,468,580650 Leasing Co.      2,038,955    954,294    0.00      404,732Sun Leasing Co.      6,194,365   2,679,882    0.00     4,532,004MillcreekLeasing Co.       1305,752    -83,676    0.53      435,448Tropic Sun Shipping    3,986,919   1,501,298    2.73      644,829Sun Transport, Inc.   79,520,790  21,932,881    20.91     2,356,829SunocoOverseas, Inc.      -108,199    290,314    0.00      211,438Sun Refining &Marketing Co.     *96  672,597,605   1,095,517    20.27    44,588,973Sun OilTrading Co.       13,481,454   4,673,000    0.00      549,406Sun Co., Inc.      760,884,991  23,864,572    6.47    157,687,537Sun Oil Intl.      19,593,916   6,769,393    34.60     7,190,703North SeaSun Oil Co.       36,565,327  36,394,917    97.00    28,050,064Claymont InvestmentCo.           513,112,873    111,203    0.00    217,180,793          _____________ ___________         ___________ Total        2,120,804,251 105,113,461         469,422,477             [table continued]           Gross          income   Section    Section     Section           ratio  1.861-8(e)  1.861-8(e)   1.861-8(e)   Interest        percent2  (2)(vi)(A) (2)(vi)(B)(1) (2)(vi)(B)(2) apportioned        __________  __________ _____________ ____________  ___________Kee Leasing Co.    12.94   $ 27,608*97    -        -         $ 27,608666 Leasing Co.    44.80  1,750,615   -        -         1750,615670 Leasing Co.    42.35   621,956   -        -         621,956650 Leasing Co.    46.80   189,427   -        -         189,427Sun Leasing Co.    43.26  1,960,691   -        -        1,960,691MillcreekLeasing Co.      0.00  -         $ 1,154  -          1,154Tropic Sun Shipping  37.66   242,814   -        -         242,814Sun Transport, Inc.  27.58   650,044   -        -         650,044SunocoOverseas, Inc.    100.00  -       -         $ 105,719    105,719Sun Refining &Marketing Co.      0.16  -         4,519,092 -        4,519,092Sun OilTrading Co.      34.66   190,437   -        -         190,437Sun Co., Inc.      3.14  -       35,097,676 -       35,097,676Sun Oil*98  Intl.     34.55  2,484,276   -        -        2,484,276North SeaSun Oil Co.      99.53  -       -        27,629,313   27,629,313Claymont InvestmentCo.           0.02    47,068   -        -          47,068                                  __________ Total                                45,517,890*217  1986 Netting                       Asset                       ratio   Interest*99    Interest          Gross income   Foreign GI percent   expense    income          ____________   __________ _______   ________   ________Kee Leasing Co.    $ 2,013,346   $ 260,455   4.71   $ 213,410    $ 9,844666 Leasing Co.     7,082,756   3,172,987   18.63   3,907,731    736,783670 Leasing Co.     3,533,401   1,496,424   42.66   1,468,580    540,553650 Leasing Co.     2,038,955    954,294   0.00    404,732    130,367Sun Leasing Co.     6,194,365   2,679,882   0.00   4,532,004    834,601MillcreekLeasing Co.      1305,752    -83,676   0.53    435,448    662,752Tropic Sun Shipping   3,986,919   1,501,298   2.73    644,829   1,148,919Sun Transport, Inc.   79,520,790  21,932,881   20.91   2,356,829    646,275SunocoOverseas, Inc.      -108,199    290,314   0.00    211,438    189,663Sun Refining &Marketing Co.     672,597,605   1,095,517   20.27  44,588,973  23,675,379Sun OilTrading Co.      13,481,454   4,673,000   0.00    549,406   *100  317,610Sun Company Inc.    760,884,991  23,864,572   6.47 157,687,537    937,176Sun Oil Intl.      19,593,916   6,769,393   34.60   7,190,703  12,824,523North SeaSun Oil Co.      36,565,327  36,394,917   97.00  28,050,064   1,784,106Claymont InvestmentCo.          513,112,873    111,203   0.00 217,180,793 505,319,941          _____________ ___________      ___________ ___________ Total       2,120,804,251 105,113,461      469,422,477 549,758,492             [table continued]                  Gross                  income    Section     Section                  ratio    1.861-8(e)   1.861-8(e)          Net interest  percent4  (2)(vi)(A)   (2)(vi)(B)(1)          ____________  __________  __________   ____________Kee Leasing Co.     $ 203,566    13.00    $ 26,464   -666 Leasing Co.     3,170,948    50.00    1,585,474   -670*101  Leasing Co.      928,027    50.00     464,014   -650 Leasing Co.      274,365    50.00     137,183   -Sun Leasing Co.     3,697,403    50.00    1,848,702   -Millcreek                          -Leasing Co.       -0-      0.00      -0-Tropic Sun Shipping    -0-      44.92      -0-    -Sun Transport, Inc.   1,710,554    27.81     475,659   -SunocoOverseas, Inc.      21,775   100.00    -       -Sun Refining &Marketing Co.     20,913,594   50.14    -         2,119,593Sun OilTrading Co.       231,796    35.50     82,285   -Sun Company Inc.   156,750,361    3.14    -       65,067,379Sun Oil Intl.       -0-      54.58      -0-    -North SeaSun Oil Co.      26,265,958  799.51    -       -Claymont InvestmentCo.            -0-      0.04      -0-    -          ___________ Total*102         214,168,347             [table continued]               Section              1.861-8(e)       Interest             (2)(vi)(B)(2)     apportioned             _____________     ____________Kee Leasing Co.       -            $ 26,464666 Leasing Co.       -            1,585,474670 Leasing Co.       -             464,014650 Leasing Co.       -             137,183Sun Leasing Co.       -            1,848,702MillcreekLeasing Co.        -              -0-Tropic Sun Shipping     -              -0-Sun Transport, Inc.     -             475,659SunocoOverseas, Inc.          10,888        10,888Sun Refining &Marketing Co.        -            2,119,593Sun OilTrading Co.        - *103              82,285Sun Company Inc.      -          [6]5,067,379Sun Oil Intl.        -              -0-North SeaSun Oil Co.         25,871,969      25,871,969Claymont InvestmentCo.             -              -0-                        __________ Total                     37,689,970*104 Footnotes1. One of petitioner's exhibits lists this amount as $2,114,469. See p. 17, infra↩.1. See p. 10, supra↩.1. n1Based upon taxable income of $ 625,000.↩1. See p. 9, supra↩1. Cannot reconcile this amount with the fact that this corporation realized interest income of $ 646,275 during 1986.↩2. Foreign source gross income divided by total gross income.↩3. It appears that this amount should be $ 5,101,192 (i.e., $ 157,687,537 x 6.47 percent x 50 percent).↩1. Cannot reconcile this amount with the fact that this corporation realized interest income of $ 646,275 during 1986.↩4. Foreign source gross income divided by the excess of total gross income over interest income.↩5. It appears that this percentage should be 0.17 percent (i.e., $ 1,095,517 ($ 672,597,605 - $ 23,675,379)).↩6. It appears that this amount should be $ 5,070,874 (i.e., $ 156,750,361 x 6.47 percent x 50 percent).↩7. Interest income treated as foreign source income. Thus in computing the allocation ratio, 99.51 percent, interest income is removed from both the numerator and the denominator of the fraction (($ 36,394,917 - $ 1,784,106) ($ 36,565,327 - $ 1,784,106)).↩