Acquired group may switch to tax book value for interest allocation

Plain-English summary

A domestic corporate group had used fair market value to apportion interest expense because a former parent required that method. After later ownership changes, the group asked to use tax book value to reduce the cost and complexity of valuation studies. The IRS approved the change for the group's short taxable year and all later years, across all operative Code sections. If the taxpayer used tax book value, every member of its new parent's consolidated group also had to use that method.

Ruling snapshot

• Question: May the acquired consolidated group change from fair market value to tax book value when apportioning interest expense?
• Outcome: Approved
• 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: 201552014 [Third Party Communication:
Release Date: 12/24/2015 Date of Communication: Month DD, YYYY]
Index Number: 9413.03-02
Person To Contact:
---------------------------- ---------------------, ID No. ------------------
------------------------------ Telephone Number:
-------------------------- ----------------------
------------------------------ Refer Reply To:
-------------------------------------------- CC:INTL:B03
-------------------------------------------- PLR-127916-15
Date:
September 16, 2015

              TY: -------

Corp X = -------------------------------------------------------------------------------------------------
---------------------------------
Year 1 = -------
Corp Y = ------------------
Year 2 = -------
Date 1 = -----------------
Corp Z = ---------------------------------
Date 2 = -----------------
Date 3 = ----------------------

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

This is in response to your representative’s letter dated August 19, 2015, requesting a
ruling that Corp X and its subsidiaries be permitted to change from the fair market value
method to the 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 Corp X 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
has used the fair market value method of asset valuation for several years beginning
with Year 1. At that time, Corp X was owned by Corp Y which had numerous other
subsidiaries. Because of Corp Y’s ownership of Corp X, Corp X was required by Temp.
PLR-127916-15 2

Treas. Reg. §1.861-8T(c)(2) to conform its method to that used by Corp Y and its
related entities.

In Year 2, several years after Year 1, Corp Y sold Corp X. On Date 1, in a year several
years after Year 2, Corp X was again sold. The acquisition was effectuated through
Corp Z formed solely to acquire Corp X and its affiliated corporations. As a result of the
acquisition, Corp X will file a final U.S. consolidated income tax return for the short tax
year ended on Date 2 and will be included as part of Corp Z’s first consolidated return
filed for the short tax period ended on Date 3.

Corp X wishes to change to the tax book value method for its short taxable year ending
Date 2 to decrease complexity and reduce costs by avoiding the need to have fair
market value studies prepared.

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, Corp X may
use the tax book value method of assets 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 its
short taxable year ending on Date 2 and all subsequent taxable years and for all
operative sections, including sections 199 and 904 of the Code, pursuant to Treas. Reg.
§1.861-8(f)(2). Pursuant to Temp. Treas. Reg. §1.861-8T(c)(2), all members of the
Corp Z consolidated group will be required to use the tax book value method of assets
valuation should Corp X use the tax book value method.

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 Corp X. 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 representatives.
PLR-127916-15 3

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

                                  Sincerely,



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

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