Consolidated group may use tax book value for interest allocation

Plain-English summary

The parent of a consolidated corporate group had used fair market value to value assets when allocating and apportioning interest expense. Because the regulations generally require continued use of that method unless the Commissioner authorizes a change, the taxpayer requested permission to switch to tax book value. The IRS approved the change for the specified tax year and all later years. The tax book value method would apply for all operative Code sections, including sections 199 and 904.

Ruling snapshot

• Question: Could a consolidated group change its interest-expense asset valuation method from fair market value to tax book value?
• Outcome: Approved for the requested year and all subsequent years.
• Key authorities: IRC § 864(e); Treas. Reg. §§ 1.861-8, 1.861-8T, 1.861-9T.

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201640012                                              Third Party Communication: None
Release Date: 9/30/2016                                        Date of Communication: Not Applicable
Index Number: 9413.03-02
                                                               Person To Contact:
                                                               ----------------------, ID No. ----------------
------------------------------------------                     Telephone Number:
---------------------------                                    --------------------
-----------------------------------                            Refer Reply To:
------------------------                                       CC:INTL:B03
---------------------------                                    PLR-118928-16
                                                               Date:
                                                               July 01, 2016




Legend

Taxpayer                   =        ------------------------------------------
                                    ------------------------

Dear ------------------

This is in response to your representative’s letter dated June 9, 2016, requesting a
ruling that Taxpayer 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 for
Taxpayer’s taxable year beginning on October 1, -------, and for all subsequent years.

The ruling contained in this letter is based upon information and representations
submitted by 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 ruling, it is subject to verification on examination.

Taxpayer is the common parent of a group of affiliated corporations that files a
consolidated U.S. federal income tax return. Taxpayer uses the accrual method as its
overall method of accounting and its annual accounting period ends on September 30.
Taxpayer utilized the fair market value method of asset valuation for several taxable
years ending prior to October 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 the tax book value or the fair market value of its assets. Treas. Reg.
PLR-118928-16                                  2

§ 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.

Taxpayer requests, pursuant to 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 its
taxable year beginning on October 1, -------, and for all subsequent years.

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),
Taxpayer may value its 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 its taxable year beginning on October 1,
-------, and for all subsequent years.

This ruling is directed only to Taxpayer. 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)



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