Allocation and Apportionment of Expenses Alternative Method for Determining Tax Book Value of Assets, 4813-4815 [06-766]
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Federal Register / Vol. 71, No. 19 / Monday, January 30, 2006 / Rules and Regulations
‘‘Argentina,’’ before the word
‘‘Australia,’’.
I 3. Section 94.26 is amended as
follows:
I 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.
I b. In paragraph (a), by removing the
words ‘‘Government of Mexico’’ and
adding the words ‘‘national Government
of the exporting region’’ in their place.
I 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.
I 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
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
cprice-sewell on PROD1PC66 with RULES
AGENCY:
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
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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
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4813
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
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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:
I
PART 1—INCOME TAXES
Paragraph 1. The authority for part 1
continues to read, in part, as follows:
I
Authority: 26 U.S.C. 7805 * * *.
I Par. 2. Section 1.861–9 is amended as
follows:
I 1. Revise paragraphs (h)(6) and (j).
I 2. Add paragraph (i).
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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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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
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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).
I Par. 3. Section 1.861–9T is amended
as follows:
I 1. Revise the second sentence in
paragraph (g)(1)(ii) introductory text.
I 2. Revise paragraph (i).
The revisions read as follows:
4815
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:
DEPARTMENT OF THE TREASURY
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.
Internal Revenue Service
Explanation of Provisions
26 CFR Part 301
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
§ 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
[TD 9246]
RIN 1545–BD37
Clarification of Definitions
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:
SUMMARY: This document contains final
regulations defining the terms
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]]>Agencies
[Federal Register Volume 71, Number 19 (Monday, January 30, 2006)]
[Rules and Regulations]
[Pages 4813-4815]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-766]
=======================================================================
-----------------------------------------------------------------------
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 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
