[Federal Register Volume 79, Number 136 (Wednesday, July 16, 2014)]
[Rules and Regulations]
[Pages 41424-41426]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-16461]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9676]
RIN 1545-BJ59


Allocation and Apportionment of Interest Expense

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations that provide guidance 
concerning the allocation and apportionment of interest expense by 
corporations owning a 10 percent or greater interest in a partnership, 
as well as the allocation and apportionment of interest expense using 
the fair market value method. These regulations also update the 
interest allocation regulations to conform to the statutory changes 
made by section 216 of the legislation commonly referred to as the 
Education Jobs and Medicaid Assistance Act (EJMAA), enacted on August 
10, 2010, affecting the affiliation of certain foreign corporations for 
purposes of section 864(e). These regulations affect taxpayers that 
allocate and apportion interest expense.

DATES: Effective Date: These regulations are effective on July 16, 
2014.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.861-9(k) and 1.861-11(d)(6)(ii).

FOR FURTHER INFORMATION CONTACT: Jeffrey L. Parry, (202) 317-6936 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    On September 14, 1988, a notice of proposed rulemaking by cross-
reference to temporary regulations and temporary regulations (TD 8228) 
under section 861 of the Internal Revenue Code (Code) (the 1988 
temporary regulations) were published in the Federal Register at [53 FR 
35525] and [53 FR 35467], respectively. On January 17, 2012, a notice 
of proposed rulemaking by cross-reference to temporary regulations 
(REG-113903-10) and temporary regulations (the 2012 temporary 
regulations) (TD 9571) which revised, in part, the 1988 temporary 
regulations, were published in the Federal Register at [77 FR 2240] and 
[77 FR 2225], respectively. Corrections to the 2012 temporary 
regulations were published on February 21, 2012, in the Federal 
Register at [77 FR 9844]. No written comments were received on the 2012 
temporary regulations or on the portion of the 1988 temporary 
regulations included in this regulation. A public hearing was not 
requested and none was held. This Treasury decision adopts the proposed 
regulations published in connection with the 2012 temporary 
regulations, as well as the portions of Sec.  1.861-9T(e)(2) and (3) of 
the 1988 temporary regulations that were not amended by the 2012 
temporary regulations, with no substantive change.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13653. Therefore, a 
regulatory assessment is not required. It has also been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations, and 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), the notice of proposed rulemaking preceding this 
regulation

[[Page 41425]]

was submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

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

List of Subjects in 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

0
Paragraph 1. The authority citation 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 by
0
1. Revising paragraphs (a), (b), (c), (d), (e), (f)(1), (f)(2), 
(f)(3)(i), (f)(5), (g), (h)(1), (h)(2), (h)(3), and (h)(4); and
0
2. Adding five new sentences to the end of paragraph (k).
    The revisions and addition read as follows:


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

    (a) through (e)(1) [Reserved]. For further guidance, see Sec.  
1.861-9T(a) through (e)(1).
    (2) Corporate partners whose interest in the partnership is 10 
percent or more. A corporate partner shall apportion its interest 
expense, including the partner's distributive share of partnership 
interest expense, by reference to the partner's assets, including the 
partner's pro rata share of partnership assets, under the rules of 
paragraph (f) of this section if the corporate partner's direct and 
indirect interest in the partnership (as determined under the 
attribution rules of section 318) is 10 percent or more. A corporation 
using the tax book value method or alternative tax book value method of 
apportionment shall use the partnership's inside basis in its assets, 
including adjustments under sections 734(b) and 743(b), if any, and 
adjusted to the extent required under Sec.  1.861-10T(d)(2). A 
corporation using the fair market value method of apportionment shall 
use the fair market value of the partnership's assets, adjusted to the 
extent required under Sec.  1.861-10T(d)(2).
    (3) Individual partners who are general partners or who are limited 
partners with an interest in the partnership of 10 percent or more. An 
individual partner is subject to the rules of this paragraph (e)(3) if 
either the individual is a general partner or the individual's direct 
and indirect interest (as determined under the attribution rules of 
section 318) in the partnership is 10 percent or more. The individual 
shall first classify his or her distributive share of partnership 
interest expense as interest incurred in the active conduct of a trade 
or business, as passive activity interest, or as investment interest 
under regulations issued under sections 163 and 469. The individual 
must then apportion his or her interest expense, including the 
partner's distributive share of partnership interest expense, under the 
rules of paragraph (d) of this section. Each such individual partner 
shall take into account his or her distributive share of the 
partnership gross income or pro rata share of the partnership assets in 
applying such rules. An individual using the tax book value or 
alternative tax book value method of apportionment shall use the 
partnership's inside basis in its assets, including adjustments under 
sections 734(b) and 743(b), if any, and adjusted to the extent required 
under Sec.  1.861-10T(d)(2). An individual using the fair market value 
method of apportionment shall use the fair market value of the 
partnership's assets, adjusted to the extent required under Sec.  
1.861-10(d)(2).
    (e)(4) through (f)(3)(i) [Reserved]. For further guidance, see 
Sec.  1.861-9T(e)(4) through (f)(3)(i).
* * * * *
    (f)(5) through (h)(3) [Reserved]. For further guidance, see Sec.  
1.861-9T(f)(5) through (h)(3).
    (h)(4) Valuing related party debt and stock in related persons--(i) 
Related party debt. For purposes of this section, the value of a debt 
obligation of a related person held by the taxpayer or another person 
related to the taxpayer equals the amount of the liability of the 
obligor related person.
    (ii) Stock in related persons. The value of stock in a related 
person held by the taxpayer or by another person related to the 
taxpayer equals the sum of the following amounts reduced by the 
taxpayer's pro rata share of liabilities of such related person:
    (A) The portion of the value of intangible assets of the taxpayer 
and related persons that is apportioned to such related person under 
Sec.  1.861-9T(h)(2);
    (B) The taxpayer's pro rata share of tangible assets held by the 
related person (as determined under Sec.  1.861-9T(h)(1)(ii));
    (C) The taxpayer's pro rata share of debt obligations of any 
related person held by the related person (as valued under paragraph 
(h)(4)(i) of this section); and
    (D) The total value of stock in all related persons held by the 
related person as determined under this paragraph (h)(4).
    (iii)

    Example. (A) Facts. USP, a domestic corporation, wholly owns 
CFC1 and owns 80% of CFC2, both foreign corporations. The aggregate 
trading value of USP's stock traded on established securities 
markets at the end of Year 1 is $700 and the amount of USP's 
liabilities to unrelated persons at the end of Year 1 is $400. 
Neither CFC1 nor CFC2 has liabilities to unrelated persons at the 
end of Year 1. USP owns plant and equipment valued at $500, CFC1 
owns plant and equipment valued at $400, and CFC2 owns plant and 
equipment valued at $250. The value of these assets has been 
determined using generally accepted valuation techniques, as 
required by Sec.  1.861-9(h)(1)(ii). There is an outstanding loan 
from CFC2 to CFC1 in an amount of $100. There is also an outstanding 
loan from USP to CFC1 in an amount of $200.
    (B) Valuation of group assets. Pursuant to Sec.  1.861-
9T(h)(1)(i), the aggregate value of USP's assets is $1100 (the $700 
trading value of USP's stock increased by $400 of USP's liabilities 
to unrelated persons).
    (C) Valuation of tangible assets. Pursuant to Sec.  1.861-
9T(h)(1)(ii), the value of USP's tangible assets and pro rata share 
of assets held by CFC1 and CFC2 is $1100 (the plant and equipment 
held directly by USP, valued at $500, plus USP's 100% pro rata share 
of the plant and equipment held by CFC1 valued at $400 and USP's 80% 
pro rata share of the plant and equipment held by CFC 2 valued at 
$200 (80% of $250)).
    (D) Computation of intangible asset value. Pursuant to Sec.  
1.861-9T(h)(1)(iii), the value of the intangible assets of USP, 
CFC1, and CFC2 is $0 (total aggregate group asset value ($1100) 
determined in paragraph (B) less total tangible asset value ($1100) 
determined in paragraph (C)). Because the intangible asset value is 
zero, the provisions of Sec.  1.861-9T(h)(2) and (3) relating to the 
apportionment and characterization of intangible assets do not 
apply.
    (E) Valuing related party debt obligations. Pursuant to Sec.  
1.861-9(h)(4)(i), the value of the debt obligation of CFC1 held by 
CFC2 is equal to the amount of the liability, $100. The value of the 
debt obligation of CFC1 held by USP is equal to the amount of the 
liability, $200.
    (F) Valuing the stock of CFC1 and CFC2. Pursuant to Sec.  1.861-
9(h)(4)(ii), the value of the stock of CFC2 held by USP is $280 
(USP's 80% pro rata share of tangible assets of CFC2 included in 
paragraph (C) ($200) plus USP's 80% pro rata share of the debt 
obligation of CFC1 held by CFC2 valued in paragraph (E) ($80). The 
value of the stock of CFC1 held by USP is $100 (USP's 100% pro rata 
share of tangible assets of CFC1 included in paragraph (C) ($400) 
less USP's 100% pro

[[Page 41426]]

rata share of the liabilities of CFC1 to USP and CFC2 ($300)).
* * * * *
    (k) * * * Paragraphs (e)(2), (e)(3) and (h)(4) apply to taxable 
years beginning on or after July 16, 2014. See 26 CFR 1.861-9T(e)(2) 
and (3) (revised as of April 1, 2014) for rules applicable to taxable 
years beginning after January 17, 2012, and before July 16, 2014. See 
26 CFR 1.861-9T(e)(2) and (3) (revised as of April 1, 2011) for rules 
applicable to taxable years beginning on or before January 17, 2012. 
See 26 CFR 1.861-9T(h)(4) (revised as of April 1, 2014) for rules 
applicable to taxable years ending on or after January 17, 2012, and 
beginning before July 16, 2014. See 26 CFR 1.861-9T(h)(4) (revised as 
of April 1, 2011) for rules applicable to taxable years ending before 
January 17, 2012.

0
Par. 3. Section 1.861-9T is amended by:
0
1. Revising paragraphs (e)(2), (e)(3), and (h)(4);
0
2. Removing the four sentences before the last sentence of paragraph 
(k); and
0
3. Removing paragraph (l).
    The revisions read as follows:


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

* * * * *
    (e)(2) through (e)(3) [Reserved]. For further guidance see Sec.  
1.861-9(e)(2) through (e)(3).
* * * * *
    (h) * * *
    (4) [Reserved]. For further guidance see Sec.  1.861-9(h)(4).
* * * * *

0
Par. 4. In Sec.  1.861-11, paragraphs (d)(3), (d)(4), (d)(5), and 
(d)(6) are revised to read as follows:


Sec.  1.861-11  Special rules for allocating and apportioning interest 
expense of an affiliated group of corporations.

* * * * *
    (d)(3) through (6)(i) [Reserved]. For further guidance see Sec.  
1.861-11T(d)(3) through (6)(i).
    (ii) Any foreign corporation if more than 50 percent of the gross 
income of such foreign corporation for the taxable year is effectively 
connected with the conduct of a trade or business within the United 
States and at least 80 percent of either the vote or value of all 
outstanding stock of such foreign corporation is owned directly or 
indirectly by members of the affiliated group (determined with regard 
to this sentence). This paragraph (d)(6)(ii) applies to taxable years 
beginning on or after July 16, 2014. See 26 CFR 1.861-11T(d)(6)(ii) 
(revised as of April 1, 2014) for rules applicable to taxable years 
beginning after August 10, 2010, and before July 16, 2014. See 26 CFR 
1.861-11T(d)(6)(ii) (revised as of April 1, 2010) for rules applicable 
to taxable years beginning on or before August 10, 2010.
* * * * *

0
Par. 5. Sec 1.861-11T is amended by:
0
1. Revising paragraph (d)(6)(ii);
0
2. Removing the last two sentences of paragraph (h); and
0
3. Removing paragraph (i).
    The revision reads as follows:


1.861-11T.  Special rules for allocating and apportioning interest 
expense of an affiliated group of corporations (temporary).

* * * * *
    (d) * * *
    (6) * * *
    (ii) [Reserved]. For further guidance see Sec.  1.861-11(d)(6)(ii).
* * * * *

John Dalrymple,
Deputy Commissioner for Services and Enforcement.

    Approved: June 17, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-16461 Filed 7-15-14; 8:45 am]
BILLING CODE 4830-01-P