[Federal Register Volume 71, Number 19 (Monday, January 30, 2006)]
[Rules and Regulations]
[Pages 4813-4815]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-766]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9247]
RIN 1545-BF23


Allocation and Apportionment of Expenses Alternative Method for 
Determining Tax Book Value of Assets

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations providing an 
alternative method of valuing assets for purposes of apportioning 
expenses under the tax book value method of Sec.  1.861-9T. The 
alternative tax book value method, which is elective, allows taxpayers 
to determine, for purposes of apportioning expenses, the tax book value 
of all tangible property that is subject to a depreciation deduction 
under section 168 by using the straight line method, conventions, and 
recovery periods of the alternative depreciation system under section 
168(g)(2). The alternative tax book value method is intended to 
minimize basis disparities between foreign and domestic assets of 
taxpayers that may arise when taxpayers use adjusted tax basis to value 
assets under the tax book value method of expense apportionment. These 
final regulations may affect taxpayers that are required to apportion 
expenses under section 861.

DATES: Effective Date: These regulations are effective January 30, 
2006.
    Applicability Dates: For dates of applicability, see Sec.  1.861-
9(i)(4).

FOR FURTHER INFORMATION CONTACT: David Bergkuist at (202) 622-3850 (not 
a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

    On September 14, 1988, the IRS published temporary regulations (TD 
8228 (1988-2 CB 136) (53 FR 35467)) that address the allocation and 
apportionment of interest expense. On March 26, 2004, the IRS published 
a Treasury decision, TD 9120 (2004-1 CB 881) (69 FR 15673), which 
contained temporary regulations that provide for an alternative method 
of valuing assets for purposes of apportioning expenses under the tax 
book value method of Sec.  1.861-9T, and a notice of proposed 
rulemaking that cross-references the temporary regulations, 2004-1 CB 
894 (69 FR 15753). A public hearing was held on July 19, 2004.
    For purposes of allocating and apportioning expenses, a taxpayer 
may compute the value of its assets under either the tax book value 
method or the fair market value method. Sections 1.861-8T(c)(2) and 
1.861-9T(g)(1)(ii). The temporary and proposed regulations issued in 
2004 provided taxpayers with an alternative method of apportioning 
expenses under the tax book value method. This alternative tax book 
value method, which is elective, allows taxpayers to determine, for 
purposes of apportioning expenses, the tax book value of all tangible 
property that is subject to a depreciation deduction under section 168 
by using the straight line method, conventions, and recovery periods of 
the alternative depreciation system under section 168(g)(2). The 
alternative method provided in the temporary and proposed regulations 
is intended to minimize basis disparities between foreign and domestic 
assets of taxpayers that may arise when taxpayers use adjusted tax 
basis to value assets under the tax book value method of expense 
apportionment.
    Taxpayers using the tax book value method, including those that 
have elected the alternative tax book value method, may elect to change 
to the fair market value method at any time. Rev. Proc. 2003-37 (2003-1 
CB 950) (May 27, 2003). Taxpayers that elect to use the fair market 
value method must continue to use that method unless expressly 
authorized by the Commissioner to change methods. See Sec.  1.861-
8T(c)(2). See also Rev. Proc. 2005-28, 2005-21 IRB 1093 (May 23, 2005), 
regarding automatic consent procedure applicable for taxable years 
beginning on or after March 26, 2004, but before March 26, 2006, for 
which no return has previously been filed. Revocation of an election to 
use the alternative tax book value method, other than in conjunction 
with an election to use the fair market value method, for a taxable 
year prior to the sixth taxable year for which the election applies 
requires the consent of the Commissioner.

Explanation of Provisions and Summary of Comments

    These final regulations adopt the rules of the temporary and 
proposed regulations. The alternative tax book value method, as set 
forth in Sec.  1.861-9(i), allows a taxpayer to elect to determine the 
tax book value of its tangible property that is subject to depreciation 
under section 168 of the Internal Revenue Code (Code) as though all 
such property had been depreciated using the alternative depreciation 
system under section 168(g) during the entire period in which the 
property has been in service. These final regulations prescribe the 
application of section 168(g)(2) solely for determining an asset's tax 
book value for purposes of apportioning expenses (including the 
calculation of the alternative minimum tax foreign tax credit pursuant 
to section 59(a)) under the asset method described in Sec.  1.861-
9T(g). Application of section 168(g)(2) pursuant to these final 
regulations does not otherwise affect the results under other 
provisions of the Code, including the amount of any deduction claimed 
under sections 167, 168, 169, 263(a), 617, or any other capital cost 
recovery provision.
    As with the temporary and proposed regulations, the final 
regulations generally provide that, for a taxpayer that elects the 
alternative tax book value method, the tax book value of tangible 
property that is depreciated under section 168 of the Code is 
determined as though such property were subject to the alternative 
depreciation system under section 168(g) for the entire period that 
such property has been in service. Thus, if a taxpayer elects the 
alternative tax book value method effective for the 2005 taxable year, 
the tax book value of tangible property placed in service in 2005 is 
determined each year using the rules of section 168(g) that apply to 
property placed in service in 2005 and the tax book value of tangible 
property placed in service in 2006 is determined each year using the

[[Page 4814]]

rules of section 168(g) that apply to property placed in service in 
2006. However, in the case of tangible property placed in service in a 
taxable year prior to the first taxable year to which the election to 
use the alternative tax book value method applies, the tax book value 
of such property is determined using the alternative depreciation 
system rules that apply to property placed in service in the taxable 
year to which the election first applies. Thus, if a taxpayer elects 
the alternative tax book value method effective for the 2005 taxable 
year, the tax book value of tangible property placed in service in 2004 
and prior years is determined each year using the rules of section 
168(g) that apply to property placed in service in 2005. A special rule 
also applies in determining tax book value in cases where a taxpayer 
makes an election to use the alternative tax book value method after 
recently (within three years) revoking a prior election to use that 
method.
    A public hearing was held and comments were received.
    One commentator viewed the rule for property placed in service 
prior to the election to use the alternative tax book value method as 
unclear and suggested alternative phrasing to that in Sec.  1.861-
9T(i)(1)(ii). As the commentator noted, any lack of clarity arises only 
if the rule of Sec.  1.861-9T(i)(1)(ii) is read in isolation, without 
reference to Example 1 in Sec.  1.861-9T(i)(1)(v). Because the Treasury 
Department and the IRS believe that the provision is clear when read in 
context and properly illustrated in Sec.  1.861-9T(i)(1)(v), and 
because the alternative phrasing suggested by the commentator would 
raise greater questions of clarity, the language from the temporary 
regulation is retained.
    Commentators also requested that disparities in addition to 
depreciation, such as the treatment of intangible drilling costs and 
certain inventory adjustments, be addressed as part of the alternative 
tax book value method. The Treasury Department and the IRS are actively 
studying these and other disparities as well as what rules might be 
fashioned to address them. The final regulations therefore include a 
subsection that reserves as to certain other adjustments, pending the 
outcome of this review. The Treasury Department and the IRS welcome 
specific suggestions as to proper treatment of such adjustments.
    One commentator requested that the IRS issue guidance granting 
automatic consent to change from the fair market value method to the 
tax book value method, including an election to determine tax book 
value using the alternative tax book method, in the context of a merger 
or acquisition, allowing the parties to the transaction to conform 
their methods. This comment is beyond the scope of the regulations, as 
it is part of a broader issue as to how to address inconsistent 
elections when companies merge or enter into similar transactions. 
Accordingly, the Treasury Department and the IRS have not considered it 
as part of finalizing the temporary and proposed regulations.
    One commentator suggested that taxpayers be able to elect the use 
of the alternative tax book value method for all open years. Adoption 
of this suggestion would raise significant fairness and administrative 
concerns. Accordingly, the suggestion was not adopted, and the 
effective date set forth in the temporary regulations is retained.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. Because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the proposed 
regulations preceding these regulations were submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small businesses.

Drafting Information

    The principal author of these regulations is David Bergkuist, 
Office of Associate Chief Counsel (International). However, other 
personnel from the IRS and the Treasury Department participated in 
their development.

List of Subjects 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority for part 1 continues to read, in part, as 
follows:

    Authority: 26 U.S.C. 7805 * * *.


0
Par. 2. Section 1.861-9 is amended as follows:
0
1. Revise paragraphs (h)(6) and (j).
0
2. Add paragraph (i).
    The revision and addition read as follows:


Sec.  1.861-9  Allocation and apportionment of interest expense.

* * * * *
    (h)(6) [Reserved]. For further guidance, see Sec.  1.861-9T(h)(6).
    (i) Alternative tax book value method--(1) Alternative value for 
certain tangible property. A taxpayer may elect to determine the tax 
book value of its tangible property that is depreciated under section 
168 (section 168 property) using the rules provided in this paragraph 
(i)(1) (the alternative tax book value method). The alternative tax 
book value method applies solely for purposes of apportioning expenses 
(including the calculation of the alternative minimum tax foreign tax 
credit pursuant to section 59(a)) under the asset method described in 
paragraph (g) of this section.
    (i) The tax book value of section 168 property placed in service 
during or after the first taxable year to which the election to use the 
alternative tax book value method applies shall be determined as though 
such property were subject to the alternative depreciation system set 
forth in section 168(g) (or a successor provision) for the entire 
period that such property has been in service.
    (ii) In the case of section 168 property placed in service prior to 
the first taxable year to which the election to use the alternative tax 
book value method applies, the tax book value of such property shall be 
determined under the depreciation method, convention, and recovery 
period provided for under section 168(g) for the first taxable year to 
which the election applies.
    (iii) If a taxpayer revokes an election to use the alternative tax 
book value method (the prior election) and later makes another election 
to use the alternative tax book value method (the subsequent election) 
that is effective for a taxable year that begins within 3 years of the 
end of the last taxable year to which the prior election applied, the 
taxpayer shall determine the tax book value of its section 168 property 
as though the prior election has remained in effect.
    (iv) The tax book value of section 168 property shall be determined 
without regard to the election to expense certain depreciable assets 
under section 179.
    (v) Examples. The provisions of this paragraph (i)(1) are 
illustrated in the following examples:

    Example 1. In 2000, a taxpayer purchases and places in service 
section 168 property used solely in the United States. In 2005, the 
taxpayer elects to use the alternative tax book

[[Page 4815]]

value method, effective for the current taxable year. For purposes 
of determining the tax book value of its section 168 property, the 
taxpayer's depreciation deduction is determined by applying the 
method, convention, and recovery period rules of the alternative 
depreciation system under section 168(g)(2) as in effect in 2005 to 
the taxpayer's original cost basis in such property. In 2006, the 
taxpayer acquires and places in service in the United States new 
section 168 property. The tax book value of this section 168 
property is determined under the rules of section 168(g)(2) 
applicable to property placed in service in 2006.
    Example 2. Assume the same facts as in Example 1, except that 
the taxpayer revokes the alternative tax book value method election 
effective for taxable year 2010. Additionally, in 2011, the taxpayer 
acquires new section 168 property and places it in service in the 
United States. If the taxpayer elects to use the alternative tax 
book value method effective for taxable year 2012, the taxpayer must 
determine the tax book value of its section 168 property as though 
the prior election still applied. Thus, the tax book value of 
property placed in service prior to 2005 would be determined by 
applying the method, convention, and recovery period rules of the 
alternative depreciation system under section 168(g)(2) applicable 
to property placed in service in 2005. The tax book value of section 
168 property placed in service during any taxable year after 2004 
would be determined by applying the method, convention, and recovery 
period rules of the alternative depreciation system under section 
168(g)(2) applicable to property placed in service in such taxable 
year.

    (2) Timing and scope of election. (i) Except as provided in this 
paragraph (i)(2), a taxpayer may elect to use the alternative tax book 
value method with respect to any taxable year beginning on or after 
March 26, 2004. However, pursuant to Sec.  1.861-8T(c)(2), a taxpayer 
that has elected the fair market value method must obtain the consent 
of the Commissioner prior to electing the alternative tax book value 
method. Any election made pursuant to this paragraph (i)(2) shall apply 
to all members of an affiliated group of corporations as defined in 
Sec. Sec.  1.861-11(d) and 1.861-11T(d). Any election made pursuant to 
this paragraph (i)(2) shall apply to all subsequent taxable years of 
the taxpayer unless revoked by the taxpayer. Revocation of such an 
election, other than in conjunction with an election to use the fair 
market value method, for a taxable year prior to the sixth taxable year 
for which the election applies requires the consent of the 
Commissioner.
    (ii) Example. The provisions of this paragraph (i)(2) are 
illustrated in the following example:

    Example. Corporation X, a calendar year taxpayer, elects on its 
original, timely filed tax return for the taxable year ending 
December 31, 2007, to use the alternative tax book value method for 
its 2007 year. The alternative tax book value method applies to 
Corporation X's 2007 year and all subsequent taxable years. 
Corporation X may not, without the consent of the Commissioner, 
revoke its election and determine tax book value using a method 
other than the alternative tax book value method with respect to any 
taxable year beginning before January 1, 2012. However, Corporation 
X may automatically elect to change from the alternative tax book 
value method to the fair market value method for any open year.

    (3) Certain other adjustments. [Reserved.]
    (4) Effective date. This paragraph (i) applies to taxable years 
beginning on or after March 26, 2004.
    (j) [Reserved]. For further guidance, see Sec.  1.861-9T(j).

0
Par. 3. Section 1.861-9T is amended as follows:
0
1. Revise the second sentence in paragraph (g)(1)(ii) introductory 
text.
0
2. Revise paragraph (i).
    The revisions read as follows:


Sec.  1.861-9T  Allocation and apportionment of interest expense 
(temporary).

* * * * *
    (g) * * *
    (1) * * *
    (ii) * * * For rules concerning the application of an alternative 
method of valuing assets for purposes of the tax book value method, see 
Sec.  1.861-9(i). * * *
* * * * *
    (i) [Reserved]. For further guidance, see Sec.  1.861-9(i).
* * * * *

    Approved: January 20, 2006.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 06-766 Filed 1-27-06; 8:45 am]
BILLING CODE 4830-01-P