Consolidated group may use tax book value for interest apportionment

Plain-English summary

A consolidated group historically used tax book value to apportion interest expense. It acquired another consolidated group that had used fair market value, causing the acquired corporations to join the buyer's group. Because a taxpayer that uses fair market value generally cannot switch methods without permission, the combined group requested authorization to use tax book value. The IRS allowed all members to use tax book value for the specified year and future years when apportioning interest expense under all operative sections, including IRC §§ 199 and 904.

Ruling snapshot

• Question: Could all members of the post-acquisition consolidated group use tax book value to apportion interest expense?
• Outcome: Approved for the specified year and future years.
• Key authorities: IRC § 864(e); Treas. Reg. §§ 1.861-8(f)(2), 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: 201638012                                              Third Party Communication: None
Release Date: 9/16/2016                                        Date of Communication: Not Applicable
Index Number: 861.09-00, 861.09-06,
              861.09-07                                        Person To Contact:
                                                               -----------------------, ID No. -------------------
                                                               ---------------------------------------------------
---------------------------------------                        Telephone Number:
-------------------------                                      --------------------
------------------------                                       Refer Reply To:
------------------------                                       CC:INTL:B03
                                                               PLR-116698-16
                                                               Date:
                                                               June 21, 2016




                  TY:------

Legend

CORP X                     =        ---------------------------------------
                                    -------------------------
CORP Y                     =        ---------------------------
DATE 1                     =        -------------------

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

This is in response to your representative’s letter dated May 23, 2016, requesting a
ruling on behalf of CORP X’s consolidated group that the consolidated group members
be permitted to value their assets on the basis of the tax book value method of asset
valuation for purposes of the consolidated group’s ------ taxable year.

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 consolidated group utilized the tax book value method of asset valuation for taxable
years prior to taxable year ------.

On DATE 1, a date in calendar year ------, CORP X completed the acquisition of CORP
Y, the common parent of a U.S. consolidated group of corporations. For several years
PLR-116698-16                                  2

prior to DATE 1, the CORP Y consolidated group utilized the fair market value method
of asset valuation. As a result of the acquisition, the CORP Y consolidated group
members became members of the CORP X consolidated group and will be included in
CORP X’s consolidated federal income tax returns starting from the day after DATE 1.

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 Treas. Reg. §§ 1.861-8T through 1.861-13T set forth the rules
specific to the allocation and apportionment of interest expense. 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. 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 Treas. Reg. §§ 1.861-8T(c)(2) and 1.861-9T(g)(1)(ii),
the CORP X consolidated group members may value their assets on the basis of the tax
book value method of asset valuation for purposes of apportioning interest expense for
all operative sections, including sections 199 and 904 of the Code, for the consolidated
group’s ------ taxable year and future years.

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 representatives.

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)

cc: