Federal Register / Vol. 71, No. 19 / Monday, January 30, 2006 / Rules and Regulations 4813 

‘‘Argentina,’’ before the word 

‘‘Australia,’’. 

■ 3. Section 94.26 is amended as 

follows: 

■ a. In the introductory text of the 

section, in the first sentence, by 

removing the words ‘‘The Mexican’’ and 

adding the words ‘‘Argentina and the 

Mexican’’ in their place. 

■ b. In paragraph (a), by removing the 

words ‘‘Government of Mexico’’ and 

adding the words ‘‘national Government 

of the exporting region’’ in their place. 

■ c. In paragraph (c)(1), by removing the 

words ‘‘Government of Mexico’’ and 

adding the words ‘‘national Government 

of the exporting region’’ in their place. 

■ d. In paragraph (c)(4), by removing the 

words ‘‘Government of Mexico’’ and 

adding the words ‘‘national Government 

of the exporting region’’ in their place. 

Done in Washington, DC, this 24th day of 

January 2006. 

Kevin Shea, 

Acting Administrator, Animal and Plant 

Health Inspection Service. 

[FR Doc. 06–840 Filed 1–27–06; 8:45 am] 

BILLING CODE 3410–34–P 

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. 

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 § 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 § 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 

§ 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 § 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 § 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 § 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 


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4814 Federal Register / Vol. 71, No. 19 / Monday, January 30, 2006 / Rules and Regulations 

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 § 1.861–

9T(i)(1)(ii). As the commentator noted, 

any lack of clarity arises only if the rule 

of § 1.861–9T(i)(1)(ii) is read in 

isolation, without reference to Example 

1 in § 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 § 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 

■ Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority for part 1 

continues to read, in part, as follows: 

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

■ Par. 2. Section 1.861–9 is amended as 

follows: 

■ 1. Revise paragraphs (h)(6) and (j). 

■ 2. Add paragraph (i). 

The revision and addition read as 

follows: 

§ 1.861–9 Allocation and apportionment of 

interest expense. 

* * * * * 

(h)(6) [Reserved]. For further 

guidance, see § 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 


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Federal Register / Vol. 71, No. 19 / Monday, January 30, 2006 / Rules and Regulations 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 § 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 §§ 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 § 1.861–9T(j). 

■ Par. 3. Section 1.861–9T is amended 

as follows: 

■ 1. Revise the second sentence in 

paragraph (g)(1)(ii) introductory text. 

■ 2. Revise paragraph (i). 

The revisions read as follows: 

§ 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 § 1.861–9(i). 

* * * 

* * * * * 

(i) [Reserved]. For further guidance, 

see § 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 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 301 

[TD 9246] 

RIN 1545–BD37 

Clarification of Definitions 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations defining the terms 

corporation and domestic in 

circumstances in which a business 

entity is created or organized in more 

than one jurisdiction. These regulations 

affect business entities that are created 

or organized under the laws of more 

than one jurisdiction. 

DATES: Effective Date: These regulations 

are effective January 30, 2006. 

Applicability Dates: For the dates of 

applicability of these regulations, see 

§§ 301.7701–2(e)(3) and 301.7701–5(c). 

FOR FURTHER INFORMATION CONTACT: 

Thomas Beem, (202) 622–3860 (not a 

toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

On August 12, 2004, the IRS and 

Treasury issued temporary regulations 

(TD 9153), 69 FR 49809, and a notice of 

proposed rulemaking (REG–124872–04), 

69 FR 49840, regarding the classification 

of business entities that are created or 

organized under the laws of more than 

one jurisdiction (dually chartered 

entities). 

Under the provisions of the temporary 

and proposed regulations, classification 

of a dually chartered entity involves two 

independent determinations: (1) 

Whether the entity is a corporation; and 

(2) whether the entity is domestic or 

foreign. The entity is a corporation 

under § 301.7701–2T(b)(9) if its form of 

organization in any one of the 

jurisdictions in which it is created or 

organized would cause it to be treated 

as a corporation under § 301.7701–2(b). 

The entity is domestic under 

§ 301.7701–5T if it is organized as any 

kind of entity in the United States or 

under the law of the United States or of 

any State. The temporary regulations 

were effective for all entities existing on 

or after August 12, 2004. 

The public hearing concerning the 

proposed regulations was canceled 

because no requests to speak were 

received. However, the IRS and 

Treasury received several written 

comments on the temporary and 

proposed regulations, which are 

discussed below. 

Explanation of Provisions 

A. Dates of Application 

The preamble to the temporary and 

proposed regulations notes that the IRS 

and Treasury consider the regulations to 

be a clarification of the entity 

classification rules as they existed prior 

to the issuance of the temporary and 

proposed regulations (pre-existing 

regulations). This belief is based on the 

view that, even absent these regulations, 

a proper application of the pre-existing 

regulations produces the same result as 


cprice-sewell on PROD1PC66 with RULES