Corporate group may switch to tax book value for interest allocation

Plain-English summary

A domestic corporate group had long used fair market value to value assets when apportioning interest expense. It asked to switch because that method required significant professional fees and employee time and produced more variable results. The IRS allowed the group to use the tax book value method beginning with the specified tax year and in later years. The approval applied to all operative Code sections, including IRC §§ 199 and 904, and to the taxpayer's related corporations.

Ruling snapshot

• Question: May the 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: 201552023 [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-128124-15
Date:
September 10, 2015

              TY: -------

Corp X = --------------------------------------------------------------------------------------------------
--------------------------------
Date 1 = --------------
Date 2 = -------------------

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

This is in response to your letter dated August 18, 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 the penalty of perjury statement which you
executed. 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 fiscal 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 since tax
year ended Date 1.

Corp X wishes to change to the tax book value method because complying with the fair
market value method requirements has resulted in Corp X incurring significant costs
both in terms of professional fees and costs related to the time incurred by company
personnel to gather data and perform calculations. In addition, changing to the tax
book value method provides less variability of results for Corp X and the Service.
PLR-128124-15 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, 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),
starting from tax year beginning on Date 2 and for 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).

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 and its subsidiaries. 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.
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 Associate Chief Counsel
                                   (International)

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