FROM THE OFFICE OF PUBLIC AFFAIRS

Today, the Treasury Department and the Internal Revenue Service issued a revenue procedure providing guidance to taxpayers that elect to apportion their interest expense on the basis of the fair market value of their assets. 

“Today’s release provides much-needed guidance to taxpayers on the information and documentation that may be provided to support a fair market value election for interest allocation purposes,” stated Assistant Secretary for Tax Policy Pamela Olson.  “It allows taxpayers maximum flexibility in the time for making such an election, while at the same time allowing issues relating to the election to be considered and resolved on a timely basis upon audit.” 

Generally, taxpayers receive a credit against their U.S. tax liability for income taxes paid or accrued to a foreign country or to a U.S. possession.  The amount of the credit is limited to the U.S. tax liability attributable to the taxpayer’s net income from foreign sources.  To determine net foreign source income, the taxpayer must allocate and apportion its expenses.  Taxpayers are required to allocate and apportion interest expense based on their assets, and may elect to do so based on the fair market value of those assets.  A taxpayer making such an election must establish the fair market value of its assets to the satisfaction of the IRS. 

The revenue procedure will assist taxpayers that use the fair market value method for interest expense apportionment.  The revenue procedure makes clear that taxpayers may make this election for any taxable year for which the statute of limitations remains open.  The revenue procedure also contains a list of documentation and information that will facilitate the IRS's audit of the taxpayer's election and determination of the fair market value of the taxpayer's assets. Finally, the revenue procedure sets forth the procedures the IRS will follow during an audit of a taxpayer that has elected to use the fair market method, including the timing for supplying the documentation and information.  If a taxpayer chooses to provide the information and documentation described in the revenue procedure within the time specified, the IRS commits to consider the taxpayer’s fair market value election promptly so that the audit cycle can be closed in the ordinary course.

The text of Revenue Procedure 2003-37 is attached.