Acquired group could adopt the parent's asset-valuation method

Plain-English summary

A domestic parent used the alternative tax book value method to value assets when apportioning interest expense. It acquired another consolidated group that had historically used fair market value. The acquired corporations became members of the parent's consolidated group immediately after the acquisition. Because a taxpayer that has used fair market value generally needs IRS authorization to change methods, the parent requested permission for the acquired group to conform. The IRS allowed the acquired group to use the alternative tax book value method from the time it joined the parent's group and in later years for all operative sections, including sections 199 and 904.

Ruling snapshot

• Question: Could an acquired consolidated group change from fair market value to the acquiring parent's alternative tax book value method for apportioning interest expense?
• Outcome: Approved from the date the acquired group joined the parent's consolidated group
• Key authorities: IRC §§ 199, 864(e), and 904; Treas. Reg. §§ 1.861-8(f)(2), 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: 201423001
Third Party Communication: None
Release Date: 6/6/2014
Date of Communication: Not Applicable
Index Number: 861.09-00, 861.09-06,
861.09-07
Person To Contact:
---------------------, ID No. -----------
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Telephone Number:
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------------------------------------------------------ Refer Reply To:
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CC:INTL:B03
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PLR-104153-14
Date:
February 27, 2014

TY: -------

Legend

Corp X = ----------------------------------------------------- Corp Y = ---------------------------------------------------------

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

This is in response to your representative’s letter dated January 24, 2014, requesting a ruling on behalf of Corp X that Corp Y and its pre-acquisition subsidiaries be permitted to change from the fair market value method to the alternative tax book value method of asset valuation for purposes of apportioning interest expense.

The rulings contained in this letter are 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 request for rulings, it is subject to verification on examination.

Corp X, a domestic corporation, is a calendar year taxpayer that uses the accrual method as its overall method of accounting. Corp X is the common parent of a group of affiliated corporations that files a consolidated U.S. federal income tax return. Corp X elected the alternative tax book value method of asset valuation in 2012. For several years prior to 2012, Corp X utilized the tax book value method of asset valuation.

In 2013, Corp X completed the acquisition of Corp Y, the common parent of a U.S. consolidated group of corporations (the Corp Y Group). For several years prior to the acquisition, the Corp Y Group utilized the fair market value method of asset valuation. As a result of the acquisition, the Corp Y Group became members of Corp X’s affiliated group of corporations and will be included in Corp X’s consolidated federal income tax return starting from the day after the acquisition date.
PLR-104153-14
2

Section 864(e) provides that all allocations and apportionments of interest expense shall be made on the basis of assets rather than gross income. Treas. Reg. §§1.861-8 through 1.861-12 and Temp. Treas. Reg. §§1.861-8T through 1.861-13T set forth the rules specific to the allocation and 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.

Based solely on the information submitted and the representations made, pursuant to Treas. Reg. §1.861-8(f)(2) and Temp. Treas. Reg. §§1.861-8T(c)(2) and 1.861- 9T(g)(1)(ii), the Corp Y Group may use the alternative tax book value method of assets valuation for purposes of apportioning interest expense for all operative sections, including sections 199 and 904 of the Code, starting from the time it became a member of Corp X’s consolidated group and for all 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 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.

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

A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling.

Sincerely,

Richard L. Chewning
Senior Counsel, Branch 3
Office of the Associate Chief Counsel
(International)