PLR 200347002: Acquired group may switch to tax book asset values for interest expense

Plain-English summary

A corporation that used tax book values to apportion interest expense acquired a group that had used fair market values. The acquired group needed IRS authorization to change its asset valuation method. The parent requested a switch to reduce valuation complexity and cost and to improve certainty. The IRS allowed the acquired group to use tax book values for the portion of the parent's tax year beginning on the specified date and for later years.

Ruling snapshot

• Question: May the acquired group change its asset valuation method for interest expense apportionment?
• Outcome: Approved for the specified partial tax year and subsequent years.
• Key authorities: IRC § 864(e)(2); Temp. Treas. Reg. §§ 1.861-8T(c)(2), 1.861-9T(g)(1)(ii).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200347002
Release Date: 11/21/2003
Index Number: 861.09-06

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Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:INTL:BR3 – PLR-137113-03
Re: ------------------------------------------- Date:
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August 19, 2003
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Legend

Corp = -----------------------------------------------------------------------------------------------------
A
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Corp = -----------------------------------------------------------------------------------------------------
B
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Date = ---------------------------
1
Date = ---------------------------
2

Dear -----------------:

This is in response to a letter dated ------------------, in which you, as the authorized representative of Corp A, requested a private letter ruling on behalf of Corp A that Corp B and its pre-acquisition subsidiaries be permitted to change to the tax book value method of asset valuation for purposes of apportioning interest expense for the portion of Corp A’s tax year that begins on Date 2, and for subsequent tax years.

The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the ruling request, it is subject to verification on examination.

Corp A is a domestic corporation that is the common parent of an affiliated group of corporations that file a consolidated federal income tax return on a calendar year basis. Corp A’s stock is widely held and publicly traded. Corp A uses the tax book value method of asset valuation, as described in Temp. Treas. Reg. '1.861-9T(g), for purposes of apportioning interest expense. On Date 1, Corp A completed the acquisition of all outstanding shares of stock of Corp B. Prior to this date, Corp B was

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the common parent of an affiliated group of corporations (the Corp B Group) that filed consolidated federal income tax returns on a calendar year basis. Prior to its acquisition, the Corp B Group had used the fair market value method of asset valuation as described in Temp. Treas. Reg. '1.861-9T(h), for purposes of apportioning interest expense. As a result of the acquisition, the Corp B Group will be included in Corp A’s consolidated federal income tax return for the portion of Corp A’s taxable year that begins on Date 2, and for subsequent years.

Section 864(e)(2) of the Internal Revenue Code provides that all allocations and apportionments of interest expense shall be made on the basis of assets rather than gross income.

Temp. Treas. Reg. '1.861-9T sets forth the rules specific to the apportionment of interest expense. Temp. Treas. Reg. '1.861-9T(g)(1)(ii) provides that a taxpayer may elect to determine the value of its assets on the basis of either the tax book value or the fair market value of its assets. Temp. Treas. Reg. '1.861-8T(c)(2) provides that once a taxpayer uses the fair market value method, the taxpayer and all related persons must continue to use such method unless expressly authorized by the Commissioner to change methods.

Temp. Treas. Reg. '1.861-9T(g)(1)(iii) provides that if the taxpayer elects the fair market value method of asset valuation, the taxpayer must establish the fair market value of its assets to the satisfaction of the Commissioner. Otherwise, the Commissioner may determine the appropriate values or require the taxpayer to use the tax book value method of apportionment. Temp. Treas. Reg. '1.861-9T(h) sets forth the rules for determining the fair market value of the taxpayer’s assets under the fair market value method.

Corp A requests, pursuant to Temp. Treas. Reg. ''1.861-8T(c)(2) and 1.861- 9T(g)(1)(ii), that the Corp B Group be permitted to use the tax book value method of asset valuation for the portion of Corp A’s tax year that begins on Date 2, and for subsequent tax years. Corp A’s ruling request states that it desires to use the tax book value method because that method: (1) decreases complexity and avoids potential disagreements with the Service with respect to the fair market value of assets; (2) avoids the cost of having fair market value studies performed; and (3) provides greater certainty of tax results for both the taxpayer and the Service.

Based solely on the information submitted, the representations made, and the reasons given for this request, the Corp B Group may change from the fair market value method of asset valuation for purposes of apportioning interest expense to the tax book value

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method, pursuant to Temp. Treas. Reg. ''1.861-8T(c)(2) and 1.861-9T(g)(1)(ii), for the portion of Corp A’s tax year that begins on Date 2, and for subsequent tax years.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to the taxpayer.

Sincerely,

Anne O’Connell Devereaux
Senior Technical Reviewer, Branch 3
Office of the Associate Chief Counsel
(International)

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