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COURT DECISIONS
Interest Netting
A common parent of an affiliated group that acquired and developed oil, gas and other energy properties could not net interest expense and income under Regs. Sec. 1.861-8(e)(2). In Sunoco, Inc., 118 TC No. 11 (2002), the Tax Court reversed its prior decision in Bowater, Inc., 101 TC 207 (1993), rev'd, 108 F3d 12 (2d Cir. 1997), and determined that Regs. Sec. 1.861-8(e)(2) does not permit interest income and expense netting.
The taxpayer claimed foreign tax credits (FTCs) under Sec. 901 in computing its affiliated group's consolidated tax liability for four tax years. In computing the overall Sec. 904 FTC limit, the taxpayer allocated and apportioned a portion of the interest expense of each group member to sources outside the US. in calculating the numerator of the limiting fraction under Sec. 904(a).
The taxpayer attempted to change the manner in which it allocated and apportioned the interest expenses. It contended that it could allocate and apportion net (rather than gross) interest expense in calculating taxable income under Regs. Sec. 1.861-8(e)(2) as in effect for the four tax years in issue, in computing taxable income from sources outside the US., which represents the numerator of the Sec. 904 limiting equation.
However, Regs. Sec. 1.861-8(e)(2) does not permit interest income and expense netting....