Sunoco, Inc. and Subsidiaries v. Commissioner

118 T.C. No. 11UNITED STATES TAX COURT
SUNOCO, INC. AND SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19631-97. Filed March 15, 2002.
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 Tax Court's decision in
Bowater, Inc., & Subs. v. Commissioner, 101 T.C.
207 (1993), revd. 108 F.3d 12 (2d Cir. 1997),
which holds the opposite, is hereby overruled.
- 2 -
Marjorie A. Burnett, Thomas D. Johnston, Robert L.
Moore II, Michael J. McGoldrick, and Nancy M. Seweryn,
for petitioner.
John A. Guarnieri, Richard H. Gannon, and Keith L.
Gorman, for respondent.
OPINION
WHALEN, Judge: Respondent determined the following
deficiencies in petitioner's Federal income tax:
Year Deficiency
1979 $10,563,157
1981 5,163,449
1983 35,916,359
Petitioner 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 context of computing the overall limit
imposed 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
-3-
references are to the Internal Revenue Code as in effect
during the years in issue, unless stated otherwise.
This issue involves the computation of income from
sources without the United States, the numerator of the
limiting fraction under 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
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
- 4 -
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 between borrowing and reducing
cash balances as sources of funds." Petitioner argues
the same two principles in the posttrial briefs filed on
its behalf. Dr. Ballentine's report states that he was
retained "to provide an economic evaluation of netting
interest income against interest expense for purposes of
the tax rules that apportion interest expense between
domestic and foreign source income."
- 5 -
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, train-
ing, 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 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
- 6 -
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 (1997); Alumax, Inc. v.
Commissioner, 109 T.C. 133 (1997), affd. 165 F.3d 822(11th Cir. 1999); Snap-Drape, Inc. v. Commissioner, 105
T.C. 16, 20 (1995), affd. 98 F.3d 194 (5th Cir. 1996);
Laureys v. Commissioner, 92 T.C. 101, 129 (1989);
Robertson v. Commissioner, T.C. Memo. 1999-130, affd.
without published opinion 87 AFTR2d 2001-1274, 2001-1 USTC
par. 50,276 (9th Cir. 2001); see also Estate of Halas v.
Commissioner, 94 T.C. 570, 577 (1990) ("In the context of
valuation cases, we have observed that experts may lose
their usefulness and credibility when they merely become
advocates for one side.").
We conclude that Dr. Ballentine's testimony does
not assist the Court in understanding the legal question
issue and is not admissible. Accordingly, we shall grant
respondent's motion in limine.
Most of the facts relating to the issue which is the
subject of this opinion were stipulated by the parties.
The stipulated facts and accompanying exhibits are so found
and are hereby incorporated in this opinion.
- 7 -
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 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.
- 8 -
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 without the United States.
The following schedule sets forth the deduction for
interest claimed by each member of petitioner's affiliated
group for each of the years in issue, the portion of such
amount that was allocated and apportioned to sources
without the United States for each year, and the ratio of
the latter to the former:
- 9 -
Apportioned
Interest to foreign Ratio
1982 expense source income percent
650 Leasing Co. $682,931 $235,504 37.12
Sun Leasing Co. 4,729,086 2,729,628 57.72
666 Leasing Co. 4,072,539 2,138,083 52.50
670 Leasing Co. 1,830,136 853,210 46.62
673 Leasing Co. 1,627,381 727,928 44.73
675 Leasing Co. 1,983,276 1,002,744 50.56
652 Leasing Co. 794,330 356,448 44.87
Kee Leasing Co. 581,235 403,610 69.44
653 Leasing Co. 814,727 398,972 48.97
667 Leasing Co. 3,286,585 1,709,024 52.00
Millcreek Leasing Co. 830,407 202,492 24.38
DeSun Shipping 47,658 33,697 70.71
Eastern Sun Shipping 37,115 24,183 65.16
NY Sun Shipping 9,970,340 8,851,391 88.78
NJ Sun Shipping 143,340 116,170 81.05
PA Shipping 46,423 29,294 63.10
Phil Sun Shipping 10,809,958 3,214,297 29.74
Western Sun Shipping 50,003 31,980 63.96
Sun Transport, Inc. 3,650,045 1,465,486 40.15
Sun Note Co. 31,066,253 31,066,253 100.00
North Sea Oil Co. 65,897 65,897 100.00
Totem 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 58.46
Sun Leasing Co. 4,736,241 2,808,118 59.29
666 Leasing Co. 4,084,197 2,580,396 63.18
670 Leasing Co. 1,756,214 973,645 55.44
652 Leasing Co. 714,282 312,641 43.77
Kee Leasing Co. 504,412 357,058 70.79
653 Leasing Co. 736,315 375,962 51.06
667 Leasing Co. 3,160,356 2,019,783 63.91
Millcreek Leasing Co. 742,214 365,707 49.27
NY Sun Shipping 9,849,306 8,573,395 87.05
NJ Sun Shipping 208,102 129,266 62.12
Phil Sun Shipping 10,688,995 3,437,299 32.16
Texas Sun Shipping 33,963 12,819 37.74
Tropic Sun Shipping 474,700 272,684 57.44
Sun Transport, Inc. 2,644,781 926,810 35.04
Heleasco Fifteen 1,444,639 1,297,009 89.78
Sun Note Co. 25,667,812 25,634,424 99.87
68,058,749 50,434,920
- 10 -
Apportioned
Interest to foreign Ratio
1984 expense source income percent
Kee Leasing Co. $408,197 $154,339 37.81
666 Leasing Co. 4,083,327 1,964,080 48.10
670 Leasing Co. 1,669,360 610,485 36.57
650 Leasing Co. 536,038 270,003 50.37
652 Leasing Co. 613,066 176,024 28.71
653 Leasing Co. 636,635 118,974 18.69
667 Leasing Co. 3,018,359 885,134 29.33
Sun Leasing Co. 4,689,864 2,059,788 43.92
NY Sun Shipping 9,712,823 9,165,743 94.37
Phil Sun Shipping 10,551,646 4,687,164 44.43
Tropic Sun Shipping 644,883 313,703 48.64
Sun Transport, Inc. 3,091,754 985,633 31.88
1
Sun Oil Trading Co. 627,633 32,260 5.14
Sun Note Co. 25,854,099 25,693,399 99.38
North Sea Sun Oil Co. 7,681,288 7,541,569 98.18
73,818,972 54,658,298
1
One of petitioner's exhibits lists this amount as $2,114,469. See p. 17, infra.
Apportioned
Interest to foreign Ratio
1986 expense source income percent
Kee Leasing Co. $213,410 $27,604 12.93
666 Leasing Co. 3,907,731 1,750,664 44.80
670 Leasing Co. 1,468,580 621,944 42.35
650 Leasing Co. 404,732 189,415 46.80
Sun Leasing Co. 4,532,004 1,960,092 43.25
Millcreek Leasing Co. 435,448 102,064 23.44
Tropic Sun Shipping 644,829 242,814 37.66
Sun Transport, Inc. 2,356,829 650,044 27.58
Sunoco Overseas, Inc. 211.438 211,438 100.00
Sun Refining & Mktg. Co. 44,588,973 4,598,484 10.31
Sun Oil Trading Co. 549,406 8,918 1.62
Sun Co., Inc. 157,687,537 5,097,677 3.23
Sun Oil Intl. 7,190,703 2,487,983 34.60
North Sea Sun Oil Co. 28,050,064 27,208,562 97.00
Claymont Investment Co. 217,180,793 47,426 0.02
469,422,477 45,205,129
The parties have stipulated that "in most cases"
the interest expense of each member of petitioner's
affiliated group of corporations was apportioned "in
general accordance with the optional gross income method
[sic] of apportionment described in Treas. Reg. §1.861-
8(e)(2)(vi)." The stipulation 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
- 11 -
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 37.15
Sun Leasing Co. 6,872,415 3,966,133 57.71
666 Leasing Co. 6,401,918 3,372,797 52.68
670 Leasing Co. 4,733,818 2,214,708 46.78
673 Leasing Co. 4,308,780 1,924,955 44.68
675 Leasing Co. 3,987,511 2,016,544 50.57
652 Leasing Co. 3,183,942 1,420,014 44.60
Kee Leasing Co. 1,720,403 1,194,921 69.46
653 Leasing Co. 3,209,671 1,576,737 49.12
667 Leasing Co. 7,577,559 3,950,760 52.14
Millcreek Leasing Co. 6,775,203 1,652,111 24.38
DeSun Shipping 1,868,480 1,321,135 70.71
Eastern Sun Shipping 340,725 222,010 65.16
NY Sun Shipping 8,302,978 6,755,590 81.36
NJ Sun Shipping -814,965 575,083 -70.57
PA Shipping 3,912,021 2,468,565 63.10
Phil Sun Shipping 6,602,489 1,963,223 29.73
Western Sun Shipping 2,574,519 1,646,584 63.96
Sun Transport, Inc. 95,328,918 38,274,373 40.15
Sun Note Co. 43,260,421 41,406,722 95.72
North Sea Oil Co. 42,518,569 42,518,569 100.00
Totem Ocean Trailer 92,031,992 57,380,743 62.35
347,985,477 219,043,773
- 12 -
Foreign Ratio
1983 Gross income gross income percent
650 Leasing Co. $2,593,100 $1,508,054 58.16
Sun Leasing Co. 6,973,146 4,151,644 59.54
666 Leasing Co. 8,943,399 5,644,013 63.11
670 Leasing Co. 4,132,347 2,304,872 55.78
652 Leasing Co. 2,523,829 1,104,364 43.76
Kee Leasing Co. 2,012,673 1,424,195 70.76
653 Leasing Co. 2,552,479 1,306,385 51.18
667 Leasing Co. 6,427,811 4,098,914 63.77
Millcreek Leasing Co. 8,220,982 4,050,674 49.27
NY Sun Shipping 7,917,134 6,891,523 87.05
NJ Sun Shipping 3,008,541 1,868,808 62.12
Phil Sun Shipping 6,930,169 2,228,559 32.16
Texas Sun Shipping 1,392,393 525,539 37.74
Tropic Sun Shipping 3,047,355 1,750,507 57.44
Sun Transport, Inc. 85,157,516 29,842,158 35.04
Heleasco Fifteen 2,415,666 2,168,805 89.78
Sun 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 37.80
666 Leasing Co. 8,573,805 4,137,017 48.25
670 Leasing Co. 4,362,352 1,586,209 36.36
650 Leasing Co. 2,657,644 1,339,771 50.41
652 Leasing Co. 2,557,004 731,691 28.62
653 Leasing Co. 2,592,171 483,157 18.64
667 Leasing Co. 6,563,855 1,936,224 20.50
Sun Leasing Co. 7,404,599 3,269,459 44.15
NY Sun Shipping 9,454,505 8,921,975 94.37
Phil Sun Shipping 5,129,727 2,278,684 44.42
Tropic Sun Shipping 4,004,764 1,948,117 48.64
Sun Transport, Inc. 73,123,906 23,311,476 31.88
Sun Oil Trading Co. 20,037,455 710,113 3.54
Sun Note Co. 40,344,826 40,094,056 99.38
North 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
Kee Leasing Co. $2,013,346 $260,455 12.94
666 Leasing Co. 7,082,756 3,172,987 44.80
670 Leasing Co. 3,533,401 1,496,424 42.35
650 Leasing Co. 2,038,955 954,294 46.80
Sun Leasing Co. 6,194,365 2,679,882 43.26
Millcreek Leasing Co. 305,752 -83,676 27.37
Tropic Sun Shipping 3,986,919 1,501,298 37.66
Sun Transport, Inc. 79,520,790 21,932,881 27.58
Sunoco Overseas, Inc. -108,199 290,314 100.00
Sun Refining & Mktg. Co. 672,597,605 1,095,517 0.16
Sun Oil Trading Co. 13,481,454 4,673,000 34.66
Sun Co., Inc. 760,884,991 23,864,572 3.14
Sun Oil Intl. 10,593,916 6,769,393 34.55
North Sea Sun Oil Co. 36,565,327 36,394.917 99.53
Claymont Investment Co. 513,112,873 111,203 00.02
2,120,804,251 105,113,461
- 13 -
In allocating and apportioning each member's interest
expense to sources without the United States under one
of the optional gross income methods described by section
1.861-8(e)(2)(vi), Income Tax Regs., petitioner started
with the gross amount of each member's interest expense
for the taxable year and did not offset that amount by
the interest income earned by that member during the year.
As mentioned above, petitioner chose to use the
foreign tax credit under 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 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)
- 14 -
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 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
- 15 -
1.861-8(e)(2)(vi), Income Tax Regs., for tax year 1986.
As mentioned above, 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 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:
- 16 -
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 $3,216,310
666 Leasing Co. 4,072,539 1,904,855 2,167,684
670 Leasing Co. 1,830,136 1,740,970 89,166
673 Leasing Co. 1,627,381 1,253,296 374,085
675 Leasing Co. 1,983,276 836,661 1,146,615
652 Leasing Co. 794,330 1,285,273 -0-
Kee Leasing Co. 581,235 13,373 567,862
653 Leasing Co. 814,727 1,309,988 -0-
667 Leasing Co. 3,286,585 2,639,109 647,476
Millcreek 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 9,116,332
NJ Sun Shipping 143,340 16,205 127,135
PA Shipping 46,423 133,771 -0-
Phil Sun Shipping 10,809,958 448,677 10,361,281
Western Sun Shipping 50,003 66,869 -0-
Sun Transport Inc. 3,650,045 99,840 3,550,205
Sun Note Co. 31,066,253 32,754,418 -0-
North Sea Oil Co. 65,897 1,176,482 -0-
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 $3,154,840
666 Leasing Co. 4,084,197 1,707,485 2,376,712
670 Leasing Co. 1,756,214 1,139,007 617,207
652 Leasing Co. 714,282 631,498 82,784
Kee Leasing Co. 504,412 6,765 497,647
653 Leasing Co. 736,315 658,732 77,583
667 Leasing Co. 3,160,356 1,489,361 1,670,995
MillCreek Leasing Co. 742,214 2,132,982 -0-
NY Sun Shipping 9,849,306 727,159 9,122,147
NJ Sun Shipping 208,102 449,738 -0-
Philadelphia Sun Shipping 10,688,995 855,141 9,833,854
Texas Sun Shipping 33,963 704,193 -0-
Tropic Sun Shipping 474,700 569,955 -0-
Sun Transport, Inc. 2,644,781 980,197 1,664,584
Heleasco Fifteen 1,444,639 246,861 1,197,778
Sun Note Co. 25,667,812 37,161,016 -0-
68,058,749 51,725,663 30,296,131
- 17 -
Interest Interest Net interest
1984 expense income expense
Kee Leasing Co. $408,197 $10,538 $397,659
666 Leasing Co. 4,083,327 2,209,163 1,874,164
670 Leasing Co. 1,669,360 1,369,504 299,856
650 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 1,406,484
Sun Leasing Co. 4,689,864 2,044,830 2,645,034
NY Sun Shipping 9,712,823 532,530 9,180,293
Phil Sun Shipping 10,551,646 676,120 9,875,526
Tropic Sun Shipping 644,883 1,040,764 -0-
Sun Transport, Inc. 3,091,754 35,223 3,056,531
1
Sun Oil Trading Co. 2,114,469 16,303,956 -0-
Sun Note Co. 25,854,099 33,533,894 -0-
North Sea Oil Co. 7,681,288 2,196,279 5,485,009
75,305,808 63,656,665 34,220,556
1
See p.10, supra.
Interest Interest Net interest
1986 expense income expense
Kee Leasing Co. $213,410 $9,844 $203,566
666 Leasing Co. 3,907,731 736,783 3,170,948
670 Leasing Co. 1,468,580 540,553 928,027
650 Leasing Co. 404,732 130,367 274,365
Sun Leasing Co. 4,532,004 834,601 3,697,403
Millcreek Leasing Co. 435,448 662,752 -0-
Tropic Sun Shipping 644,829 1,148,919 -0-
Sun Transport, Inc. 2,356,829 646,275 1,710,554
Sunoco Overseas, Inc. 211,438 189,663 21,775
Sun Refining & Mkt., Inc. 44,588,973 23,675,379 20,913,594
Sun Oil Trading Co. 549,406 317,610 231,796
Sun Co., Inc. 157,687,537 937,176 156,750,361
Sun Oil Int. 7,190,703 12,824,523 -0-
North Sea Oil Co. 28,050,064 1,784,106 26,265,958
Claymont Investment Co. 217,180,793 505,319,941 -0-
469,422,477 549,758,492 214,168,347
Petitioner argues that it is entitled to use the amount in
column three of the above schedule, i.e., the net interest
expense of each member of its affiliated group, as the
starting point for allocating and apportioning that
member's interest expense under section 1.861-8(e)(2),
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
- 18 -
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 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 condi-
tions 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.
- 19 -
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 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 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,
- 20 -
$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 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
- 21 -
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 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 issue. It shows, based upon the parties'
stipulation, the aggregate interest expense apportioned to
- 22 -
sources without the United States for each of the years in
issue as claimed on petitioner's consolidated returns, the
aggregate interest expense to be apportioned to foreign
sources if there is no netting of interest expense and
interest income, and the aggregate amount to be so
apportioned if there is netting of interest expense and
interest income. The last column of the schedule shows the
difference between the amount of interest to be apportioned
to sources without the United States, assuming that there
is no netting, and the amount of interest to be so
apportioned, assuming that there is netting:
Interest expense allocated and apportioned to sources without the United States
Year Per return No netting Netting Difference
1982 $55,704,104 $55,155,126 $17,444,643 $37,710,483
1983 50,434,920 47,362,922 17,200,130 30,162,792
1984 54,658,298 50,150,909 19,831,268 30,319,641
1986 45,205,129 45,517,890 37,689,610 7,828,280
206,002,451 198,186,847 92,165,651 106,021,196
Thus, as shown above, if there is netting, then the
aggregate interest expense to be allocated and apportioned
to sources without the United States in computing the
overall limitation on petitioner's foreign tax credit under
section 904(a) would be substantially 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
- 23 -
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 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 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
- 24 -
(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. 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.
- 25 -
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 reflect the revisions made by
the Tax Reform Act of 1986, including the enactment 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
- 26 -
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 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
- 27 -
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, consists of 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
- 28 -
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 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
- 29 -
step in determining taxable income from a specific source
or activity is to allocate and apportion the taxpayer's
"expenses, losses, and other deductions" to each of the
groupings of gross income. Sec. 1.861-8(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
- 30 -
allocated 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 apportioned "by
attributing the deduction to gross income (within the class
to which the deduction has been allocated) which is in the
- 31 -
statutory grouping or in each of the statutory groupings
and to gross income (within the class) which is in the
residual grouping." Sec. 1.861-8(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 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
- 32 -
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 (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 the money advanced to the
taxpayer to the risk of the taxpayer's entire
activities and look to the general credit of the
- 33 -
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. 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
- 34 -
"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. 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 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
- 35 -
loan, the fact that the return (cashflow) on or from the
property will be sufficient to satisfy the payments under
the loan, and the fact that the loan agreements place
restrictions on the disposal or use of the property. See
id.
Where it is found that an interest deduction is
definitely related solely to specific property, the
interest deductions are allocated solely to the gross
income derived from the specific property. See sec. 1.861-
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
- 36 -
proportion to the amount of gross income in 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" in the context of "the fungibility of money".
Based thereon, petitioner argues that the language of the
regulation "raises a contextual ambiguity with respect to
the precise definition of 'interest' and 'the cost of
borrowing'." According to petitioner, the term "interest"
can mean either net interest or gross interest, depending
on the context. Petitioner argues that, in the context of
- 37 -
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 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
- 38 -
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 identical need of
$800,000 immediately and uncertain future needs,
but has no line of credit. So, business B
obtains a loan from 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.
- 39 -
Petitioner relies heavily on the Opinion of this Court
in Bowater, Inc., & Subs. v. Commissioner, 101 T.C. 207(1993), revd. 108 F.3d 12 (2d Cir. 1997), involving the
same issue, viz, whether a taxpayer may offset interest
income and interest expense in determining the amount of
the interest deduction to be allocated and apportioned
under 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,
- 40 -
106 T.C. 1, 6 (1996), and Computervision Intl. Corp. v.
Commissioner, T.C. Memo. 1996-131, vacated and remanded
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 (2d Cir. 1997).
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 argues that petitioner's position
ignores the fact that the regulations promulgated under
- 41 -
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 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
- 42 -
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 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 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"
- 43 -
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, 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
- 44 -
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 1,000,000 500,000
Gross income ratio 100% 66.67% 33.33%
Expenses
Operating expenses 500,000 300,000 200,000
Interest expense 375,000 250,000 125,000
Total 875,000 550,000 325,000
Taxable income 625,000 450,000 175,000
Section 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 in the following schedule:
- 45 -
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 1,300,000 800,000 500,000
Gross 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
Taxable income 625,000 392,308 232,692
Sec. 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 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.
- 46 -
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 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:
With 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 1,000,000 500,000
Gross income ratio 100% 66.67% 33.33%
Expenses
Operating expenses 500,000 300,000 200,000
Interest expense 175,000 116,667 58,333
Total 675,000 416,667 258,333
Taxable income 825,000 583,333 241,667
1 1 1
Sec. 904(a) ratio 132% 93.3333% 38.6667%
1
Based upon taxable income of $625,000.
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
- 47 -
taxpayer's "entire taxable income for the same taxable
year". Sec. 904(a). This raises a question about where in
the regulations is there authority to reduce "gross income"
by the amount of netted interest.
Second, an equally important consequence of netting is
the fact that it increases the ratio under section 904(a),
and thus increases the amount of foreign tax credit, only
to the extent that the interest income that is absorbed by
interest expense in the netting process is from U.S.
sources. To the extent that a relatively greater amount of
the interest income absorbed in the netting process is from
foreign sources, then netting produces a lower ratio under
section 904(a) than not netting.
In the above example, we assumed that all of the
interest income, $200,000, was from U.S. sources. In that
case, the section 904(a) ratio computed without netting was
28 percent but was increased to 37.23 percent by netting.
On the other hand, if we assume that the interest income is
entirely from foreign sources, then the section 904(a)
ratio, without netting, is 52 percent, computed as follows:
- 48 -
No netting Total U.S. source Foreign source
Gross income
Operating income $1,300,000 $800,000 $500,000
Interest income 200,000 -0- 200,000
Total 1,500,000 800,000 700,000
Gross income ratio 100% 53.33% 46.67%
Expenses
Operating expenses 500,000 300,000 200,000
Interest expense 375,000 200,000 175,000
Total 875,000 500,000 375,000
Taxable income 625,000 300,000 325,000
Sec. 904(a) ratio 100% 48% 52%
If interest expense and interest income are netted,
however, the ratio is reduced to 37.23 percent. Thus, even
though the taxpayer received all of his interest income
from foreign sources under the regulations dealing with
interest income, sec. 1.861-2, Income Tax Regs., netting
disregards the source of the interest income that is
absorbed by interest expenses and causes the taxpayer to
obtain the same foreign tax credit as another taxpayer who
realized interest income entirely from U.S. sources. This
example demonstrates that the netting of interest expense
and interest income which petitioner argues arises from
section 1.861-8(e)(2)(i), Income Tax Regs., fails to take
into account the source of the interest income, and it
causes interest income from entirely different sources to
be treated the same.
- 49 -
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., 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 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
- 50 -
provisions define "gross income from sources within the
United States" and "gross income from sources without the
United States" to include all of the interest income earned
by the taxpayer during the taxable year. Secs. 1.861-2(a),
1.862-1(a), Income Tax Regs. In computing gross income
from sources within and without the United States, neither
the statute nor the regulations contemplate that the
portion of the taxpayer's gross income consisting of
interest income for the year will be reduced or entirely
offset by interest expenses.
As shown in the hypothetical example discussed above,
such a reduction of the amount of the taxpayer's gross
income would be necessary in a netting computation.
Otherwise, the computation would overstate the taxpayer's
taxable income for the year by the interest income that
is offset by interest expense. The adjustment to gross
income that would be necessary is depicted in the
computation set forth in the hypothetical discussed above.
It is similar to the adjustment that the parties made in
computing the taxpayer's interest expense for 1986 as shown
in the appendix.
Moreover, petitioner's position that it is entitled to
allocate net interest expense under section 1.861-8(e)(2),
- 51 -
Income Tax Regs., means that the taxpayer's interest
income, to the extent that 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.
Under interest netting, interest income is offset by
interest expense and only net interest expense is allocated
and apportioned under the source rules. In effect, the
source of the interest income that is offset is not taken
into account in the groupings of gross income and taxable
- 52 -
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(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 (5th Cir. 2001), in which
that court holds that interest netting is not permitted
- 53 -
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 (5th Cir.
1990), revg. 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 (1993).
For reasons set forth above,
An appropriate order will be
issued granting respondent’s
motion in limine.
Reviewed by the Court.
SWIFT, GERBER, RUWE, COLVIN, HALPERN, BEGHE, CHIECHI,
LARO, FOLEY, VASQUEZ, GALE, and MARVEL, JJ., agree with
this opinion.
WELLS and THORNTON, JJ., did not participate in the
consideration of this opinion.
- 54 -
Appendix
1982 Interest Net interest Asset ratio Interest apportioned to foreign
expense expense percent source income
No netting Netting
650 Leasing Co. $682,931 -0- 34.34 $234,519 -0-
Sun Leasing Co. 4,729,086 $3,216,310 64.81 3,064,921 $2,084,491
666 Leasing Co. 4,072,539 2,167,684 64.98 2,646,336 1,408,561
670 Leasing Co. 1,830,136 89,166 69.96 1,280,363 62,381
673 Leasing Co. 1,627,381 374,085 55.98 911,008 209,413
675 Leasing Co. 1,983,276 1,146,615 60.65 1,202,857 695,422
652 Leasing Co. 794,330 -0- 73.42 583,197 -0-
Kee Leasing Co. 581,235 567,862 44.47 258,475 252,528
653 Leasing Co. 814,727 -0- 89.11 726,003 -0-
667 Leasing Co. 3,286,585 647,476 80.00 2,629,268 517,981
Millcreek Leasing Co. 830,407 -0- 4.26 35,375 -0-
De Sun Shipping 47,658 -0- 0.58 276 -0-
Eastern Sun Shipping 37,115 -0- 0.51 189 -0-
NY Sun Shipping 9,970,340 9,116,332 90.23 8,996,238 8,225,666
NJ Sun Shipping 143,340 127,135 3.76 5,390 4,780
PA Shipping 46,423 -0- 2.70 1,253 -0-
Phil Sun Shipping 10,809,958 10,361,281 29.54 3,193,262 3,060,722
Western Sun Shipping 50,003 -0- 0.00 -0- -0-
Sun Transport, Inc. 3,650,045 3,550,205 25.99 948,647 922,698
Sun Note Co. 31,066,253 -0- 91.39 28,391,449 -0-
North Sea Oil Co. 65,897 -0- 34.77 22,912 -0-
Totem Ocean Trailer 46,949 -0- 49.39 23,188 -0-
Total 77,166,614 31,364,151 55,155,126 17,444,643
- 55 -
1983 Interest Net interest Asset ratio Interest apportioned to foreign
expense expense percent source income
No Netting Netting
650 Leasing Co. $612,220 -0- 27.22 $166,646 -0-
Sun Leasing Co. 4,736,241 $3,154,840 63.17 2,991,883 $1,992,912
666 Leasing Co. 4,084,197 2,376,712 53.36 2,179,328 1,268,214
670 Leasing Co. 1,756,214 617,207 71.74 1,259,908 442,784
672 Leasing Co. 714,282 82,784 57.18 408,426 47,336
Kee Leasing Co. 504,412 497,647 43.41 218,965 216,029
653 Leasing Co. 736,315 77,583 67.56 497,454 52,415
667 Leasing Co. 3,160,356 1,670,995 83.00 2,623,095 1,386,926
Millcreek Leasing Co. 742,214 -0- 5.85 43,420 -0-
NY Sun Shipping 9,849,306 9,122,147 83.33 8,207,427 7,601,485
NJ Sun Shipping Co. 208,102 -0- 1.97 4,100 -0-
Phil Sun Shipping 10,688,995 9,833,854 29.29 3,130,807 2,880,336
Texas Sun Shipping 33,963 -0- 4.56 1,549 -0-
Tropic Sun Shipping 474,700 -0- 27.47 130,400 -0-
Sun Transport, Inc. 2,644,781 1,664,584 20.58 544,296 342,571
Heleasco Fifteen 1,444,639 1,197,778 80.91 1,168,857 969,122
Sun Note Co. 25,667,812 -0- 92.67 23,786,361 -0-
Total 68,058,749 30,296,131 47,362,922 17,200,130
- 56 -
1984 Interest Net interest Asset ratio Interest apportioned to foreign
expense expense percent source income
No netting Netting
Kee Leasing Co. $408,197 $397,659 17.77 $72,537 $70,664
666 Leasing Co. 4,083,327 1,874,164 33.48 1,367,098 627,470
670 Leasing Co. 1,669,360 299,856 48.22 804,965 144,591
650 Leasing Co. 536,038 -0- 6.90 36,987 -0-
652 Leasing Co. 613,066 -0- 38.08 233,456 -0-
653 Leasing Co. 636,635 -0- 25.12 159,923 -0-
667 Leasing Co. 3,018,359 1,406,484 37.98 1,146,373 534,183
Sun Leasing Co. 4,689,864 2,645,034 44.68 2,095,431 1,181,801
NY Sun Shipping 9,712,823 9,180,293 86.91 8,441,414 7,978,593
Phil Sun Shipping 10,551,646 9,875,526 35.37 3,732,117 3,492,974
Tropic Sun Shipping 644,883 -0- 12.02 77,515 -0-
Sun Transport, Inc. 3,091,754 3,056,531 16.87 521,579 515,637
1
Sun Oil Trading Co. 627,633 -0- 0.00 -0- -0-
Sun Note Co. 25,854,099 -0- 93.06 24,059,825 -0-
North Sea Sun Oil
Co. 7,681,288 5,485,009 96.36 7,401,689 5,285,355
Total 73,818,972 34,220,556 50,150,909 19,831,268
1
See p. 9, supra
- 57 -
1986 No netting Gross
Asset income
Gross ratio Interest ratio §1.861-8(e) §1.861-8(e) §1.861-8(e) Interest
2
income Foreign GI percent expense percent (2)(vi)(A) (2)(vi)(B)(1) (2)(vi)(B)(2) apportioned
Kee Leasing Co. $2,013,346 $260,455 4.71 $213,410 12.94 $27,608 - - $27,608
666 Leasing Co. 7,082,756 3,172,987 18.63 3,907,731 44.80 1,750,615 - - 1750,615
670 Leasing Co. 3,533,401 1,496,424 42.66 1,468,580 42.35 621,956 - - 621,956
650 Leasing Co. 2,038,955 954,294 0.00 404,732 46.80 189,427 - - 189,427
Sun Leasing Co. 6,194,365 2,679,882 0.00 4,532,004 43.26 1,960,691 - - 1,960,691
Millcreek
1
Leasing Co. 305,752 -83,676 0.53 435,448 0.00 - $1,154 - 1,154
Tropic Sun Shipping 3,986,919 1,501,298 2.73 644,829 37.66 242,814 - - 242,814
Sun Transport, Inc. 79,520,790 21,932,881 20.91 2,356,829 27.58 650,044 - - 650,044
Sunoco
Overseas, Inc. -108,199 290,314 0.00 211,438 100.00 - - $105,719 105,719
Sun Refining &
Marketing Co. 672,597,605 1,095,517 20.27 44,588,973 0.16 - 4,519,092 - 4,519,092
Sun Oil
Trading Co. 13,481,454 4,673,000 0.00 549,406 34.66 190,437 - - 190,437
3 3
Sun Co., Inc. 760,884,991 23,864,572 6.47 157,687,537 3.14 - 5,097,676 - 5,097,676
Sun Oil Intl. 19,593,916 6,769,393 34.60 7,190,703 34.55 2,484,276 - - 2,484,276
North Sea
Sun Oil Co. 36,565,327 36,394,917 97.00 28,050,064 99.53 - - 27,629,313 27,629,313
Claymont Investment
Co. 513,112,873 111,203 0.00 217,180,793 0.02 47,068 - - 47,068
Total 2,120,804,251 105,113,461 469,422,477 45,517,890
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).
- 58 -
1986 Netting Gross
Asset income
ratio Interest Interest ratio §1.861-8(e) §1.861-8(e) §1.861-8(e) Interest
Gross income Foreign GI percent expense income Net interest percent4 (2)(vi)(A) (2)(vi)(B)(1) (2)(vi)(B)(2) apportioned
Kee Leasing Co. $2,013,346 $260,455 4.71 $213,410 $9,844 $203,566 13.00 $26,464 - - $26,464
666 Leasing Co. 7,082,756 3,172,987 18.63 3,907,731 736,783 3,170,948 50.00 1,585,474 - - 1,585,474
670 Leasing Co. 3,533,401 1,496,424 42.66 1,468,580 540,553 928,027 50.00 464,014 - - 464,014
650 Leasing Co. 2,038,955 954,294 0.00 404,732 130,367 274,365 50.00 137,183 - - 137,183
Sun Leasing Co. 6,194,365 2,679,882 0.00 4,532,004 834,601 3,697,403 50.00 1,848,702 - - 1,848,702
Millcreek -
1
Leasing Co. 305,752 -83,676 0.53 435,448 662,752 -0- 0.00 -0- - -0-
Tropic Sun Shipping 3,986,919 1,501,298 2.73 644,829 1,148,919 -0- 44.92 -0- - - -0-
Sun Transport, Inc. 79,520,790 21,932,881 20.91 2,356,829 646,275 1,710,554 27.81 475,659 - - 475,659
Sunoco
Overseas, Inc. -108,199 290,314 0.00 211,438 189,663 21,775 100.00 - - 10,888 10,888
Sun Refining &
5
Marketing Co. 672,597,605 1,095,517 20.27 44,588,973 23,675,379 20,913,594 0.14 - 2,119,593 - 2,119,593
Sun Oil
Trading Co. 13,481,454 4,673,000 0.00 549,406 317,610 231,796 35.50 82,285 - - 82,285
6 6
Sun Company Inc. 760,884,991 23,864,572 6.47 157,687,537 937,176 156,750,361 3.14 - 5,067,379 - 5,067,379
Sun Oil Intl. 19,593,916 6,769,393 34.60 7,190,703 12,824,523 -0- 54.58 -0- - - -0-
North Sea
7
Sun Oil Co. 36,565,327 36,394,917 97.00 28,050,064 1,784,106 26,265,958 99.51 - - 25,871,969 25,871,969
Claymont Investment
Co. 513,112,873 111,203 0.00 217,180,793 505,319,941 -0- 0.04 -0- - - -0-
Total 2,120,804,251 105,113,461 469,422,477 549,758,492 214,168,347 37,689,970
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)).