A spun-off group may change from fair market value to tax book value

Plain-English summary

A domestic consolidated group had used fair market value to apportion interest expense. After spinning off a wholly owned subsidiary, the group disposed of most of its foreign operations and represented that the fair market value method was no longer cost effective. Because that method ordinarily cannot be changed without permission, the group requested authorization to use tax book value. The IRS approved tax book value for the requested taxable year and future years. The method applies to interest expense apportionment under all operative Code sections, including sections 199 and 904.

Ruling snapshot

• Question: Could the consolidated group switch to tax book value after a spin-off materially changed its operations?
• Outcome: Approved for the requested year and future years.
• Key authorities: IRC §§ 861, 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: 201744015                                    Third Party Communication: None
Release Date: 11/3/2017                              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-115824-17
                                                     Date:
                                                     August 07, 2017


TY: ------

Legend

CORP A            = -----------------------
                    (TIN ---------------)
CORP B            = ----------------------
DATE 1            = ------
DATE 2            = ------
DATE 3            = ---------------------------

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

This is in response to your representative’s letter dated May 2, 2017 requesting a ruling
on behalf of CORP A’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 A 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 A, a domestic corporation, is a calendar year taxpayer that uses the accrual
method as its overall method of accounting. CORP A is the common parent of a group
of affiliated corporations that files a consolidated U.S. federal income tax return. CORP
A utilized the fair market value method of asset valuation for taxable years DATE 1
through DATE 2.

On DATE 3, CORP A distributed all of the outstanding shares of CORP B, a wholly
owned subsidiary of CORP A, to its stockholders in a spin-off transaction. As a result
PLR-115824-17                                  2

of this transaction, CORP A disposed of the majority of its foreign operations. CORP A
cites to the material change in its business operations making the use of the fair market
value method no longer cost effective as the primary reason for the request to switch to
the tax book value method.

Section 864(e) of the Code 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 A 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,



                                       Jeffrey L. Parry
                                       Senior Counsel, Branch 3
                                       (International)