The IRS has finalized, without substantive changes, proposed
regulations that were issued in conjunction with temporary regulations
in January 2012. The final regulations make permanent four changes to
the rules for allocating and apportioning interest expense for
partners in partnerships (T.D.
9676).
The first change is to the method for
apportioning interest expense for corporate partners whose interest in
the partnership is 10% or more. Those partners are required to
apportion their share by reference to the partnership’s assets (the
aggregate method). Under the final regulations, the corporation must
allocate its distributive share of partnership interest and its
unrelated interest expense to all of its assets, including its
proportionate share of partnership assets. The final regulations
permit corporate partners to use the alternative-tax-book-value method
in addition to the other methods for this calculation. (The
alternative-tax-book-value method is defined in Regs. Sec.
1.861-9(i)).
The regulations also finalize the requirement that, when determining the value of the assets using the tax-book-value or the alternative-tax-book-value methods, 10% or greater corporate partners must use the inside basis of the assets, including any Sec. 734(b) adjustment (adjustment to basis of undistributed partnership property) or Sec. 743(b) adjustment (adjustment to basis of partnership property upon transfer of partnership interest) (Regs. Sec. 1.861-9(e)(2)).
The second change requires individuals who are general partners or
limited partners holding an interest of 10% or more using the
tax-book-value or the alternative-tax-book-value methods to also
include any Sec. 734(b) or Sec. 743(b) adjustments in making those
calculations (Regs. Sec. 1.861-9(e)(3)).
The third change
fixes a problem in the way taxpayers were applying the regulations
(prior to the issuance of the 2012 temporary regulations) in
determining the fair market value (FMV) of assets. The IRS had
determined that taxpayers were interpreting the FMV method, which
requires related-party debt to be excluded as an asset as part of the
process for determining total intangible asset value, as meaning that
the debt also is not treated as an asset in the hands of the taxpayer
for the broader purpose of applying the asset method. In addition, for
purposes of valuing the stock in related persons, some taxpayers took
the position that those rules excluded related-party debt as an asset,
but permitted the value of stock in the related-person obligor to be
reduced by the amount of the related-party debt as a liability. These
regulations also finalize the rule that related-party debt is an asset
of the creditor that must be taken into account whether held by the
taxpayer or a related person (Regs. Sec. 1.861-9(h)(4)).
The fourth change is the amendment of Regs. Sec. 1.861-11 to reflect
a statutory amendment of Sec. 864(e)(5)(A) to provide that a foreign
corporation is treated as a member of an affiliated group for interest
allocation and apportionment purposes if more than 50% of its gross
income is effectively connected income and at least 80% of the vote or
value of its stock is owned by the affiliated group. In that case, all
of the foreign corporation’s assets and interest expense are taken
into account for purposes of applying the interest apportionment
rules.
The final regulations apply to tax years beginning
on or after July 16, 2014.
—
Sally P. Schreiber (
sschreiber@aicpa.org
) is a JofA senior editor.
