PLR 1024042: IRS approved a corporation's switch from fair market value to tax book value for interest allocation

Plain-English summary

The IRS allowed a domestic corporation to change the method it used to value assets when apportioning interest expense for foreign tax credit limitation purposes. The corporation had been using the fair market value method, but reported that maintaining that method caused substantial professional and internal costs and could produce uncertain results. The IRS permitted the switch to the tax book value method for the specified taxable year under the temporary regulations. The ruling was based solely on the submitted information, representations, and reasons for the request.

Ruling snapshot

• Question: May the corporation change from the fair market value method to the tax book value method for apportioning interest expense?
• Outcome: Approved
• Key authorities: IRC §§ 864 and 904; Temp. Treas. Reg. §§ 1.861-8T(c)(2) and 1.861-9T(g)(1)(ii)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201024042 Third Party Communication: None
Release Date: 6/18/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 861.09-00, 861.09-06, 861.09- ------------------------, ID No. -------------------
07 ----------------------------------------------------
Telephone Number:
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----------------------------- Refer Reply To:
----------------------------------- CC:INTL:B03
-------------------------------- PLR-155646-09
-------------------------------- Date:
------------------------------- March 04, 2010

      TY: -------

Taxpayer = ----------------------------------------------------
State X = -------------
Taxable Year = ------------------------------------------------------
Year 1 = -------
Type Y = ----------------------------------------------------------------------

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

This is in response to a letter you submitted, dated December 14, 2009, requesting a
ruling that Taxpayer be permitted to change to the tax book value method of asset
valuation for purposes of apportioning interest expense for the Taxable Year.

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.

Taxpayer is a domestic corporation organized under the laws of State X and classified
as a corporation for U.S. federal income tax purposes. Taxpayer uses the accrual
method as its overall method of accounting and its annual accounting period ends
December 31. Taxpayer processes and distributes products for Type Y markets.
Taxpayer must allocate and apportion its deductions, including its deduction for interest
expense, for purposes of determining its foreign tax credit limitation under section 904.
PLR-155646-09 2

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.

Taxpayer is the common parent of a group of affiliated corporations that file a
consolidated U.S. federal income tax return. Starting with the tax year ending in Year 1,
Taxpayer and its affiliates have determined the value of their assets on a fair market
value basis, pursuant to the authority granted under Temp. Treas. Reg. §1.861-
9T(g)(1)(ii). Since then, Taxpayer has continued to use the fair market value method,
as required under Temp. Treas. Reg. §1.861-8T(c)(2). However, Temp Treas. Reg.
§1.861-9T(g)(1)(iii) provides that, if a taxpayer elects the fair market value method of
asset valuation, then the taxpayer must establish the fair market value of its assets to
the satisfaction of the Commissioner. Complying with this requirement has resulted in
significant costs for Taxpayer, both in terms of professional fees and indirect costs
related to the time incurred by company personnel. Furthermore, the fair market value
method can provide uncertain results with respect to Taxpayer’s interest expense
methodology.

Therefore, Taxpayer requests that it be permitted to change to the tax book value
method because such method: (1) decreases complexity and avoids potential
disagreements with the IRS with respect to the 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. Taxpayer 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 the Taxable Year.

Based solely on the information submitted, the representations made, and the reasons
given for this request, Taxpayer may change from the fair market value method to the
tax book value method of asset valuation for purposes of apportioning interest expense,
PLR-155646-09 3

pursuant to Temp. Treas. Reg. §§1.861-8T(c)(2) and 1.861-9T(g)(1)(ii), for the Taxable
Year.

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.

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 representatives.

                                   Sincerely,



                                   Anne O'Connell Devereaux
                                   Senior Technical Reviewer, Branch 3
                                   (Associate Chief Counsel (International))

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