PLR 200406032: Corporation may use tax book values to apportion interest

Plain-English summary

A domestic corporation used fair market values of its assets to apportion interest expense. It asked to switch to tax book values beginning with its 2003 tax year, citing the cost, complexity, and potential disputes involved in valuing assets at fair market value. Under the temporary regulations, a taxpayer already using fair market value needs the Commissioner's authorization to change methods. The IRS granted the requested change for 2003 and later years based on the corporation's information, representations, and stated reasons.

Ruling snapshot

• Question: Could a corporation change from fair market value to tax book value when apportioning interest expense?
• Outcome: Approved the change for the 2003 tax year and later years.
• Key authorities: IRC § 864(e); 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: 200406032
Release Date: 02/06/2004
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:
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CC:INTL:B03 – PLR-148557-03
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Date:
October 28, 2003

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Legend

Corp = -----------------------------------------------------------------------------------------------------
A
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Dear ----------------:

This is in response to a letter dated --------------------, that was submitted on your behalf by your authorized representative requesting a ruling that Corp A be permitted to change to the tax book value method of asset valuation for purposes of apportioning interest expense for its taxable year beginning on January 1, 2003, and for all subsequent taxable 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 which files its federal income tax return on a calendar year basis. Corp A stock is widely held and publicly traded. Corp A currently

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apportions interest expense pursuant to the fair market value asset valuation method as set forth in Temp. Treas. Reg. § 1.861-9T(h).

Section 864(e) 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 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 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 it be permitted to change to the tax book value method of asset valuation for its taxable year beginning on January 1, 2003 and for all subsequent taxable 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 results for both the taxpayer and the Service.

Based solely on the information submitted, the representations made, and the reasons given for this request, Corp A may change from the fair market value method to the tax book value method of asset valuation for purposes of apportioning interest expense, pursuant to Temp. Treas. Reg. §§1.861-8T(c)(2) and 1.861-9T(g)(1)(ii), for the taxable year beginning on January 1, 2003 and for subsequent taxable years.

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

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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 your authorized representative.

Sincerely,

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

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