Interest capitalization under section 263A(f): possible use of mandated interest rate.

On April 3, 1992, Tax Executives Institute submitted the following comments to the Department of the treasury on the mandatory use of a surrogate interest rate in lieu of a taxpayer's specific interest rate for purposes of section 263A(f). The comments, which were prepared under the aegis of its Federal Tax Committee whose chair is David F. Nitschke of the Amerada Hess Corporation, were prepared in response to a request from the Treasury Department and supplemented the comments TEI submitted in December 1991 on the uniform capitalization of interest. (Those earlier comments were reprinted in the January-February 1992 issue of The Tax Executive.)

Thank you for soliciting the views of the Tax Executives Institute concerning the determination of the appropriate interest rate under section 263A(f) of the Code. As we understand it, the Treasury Department and the Internal Revenue Service are considering a proposal to provide a uniform interest rate that would be used in the calculation of the amount of interest expense to be capitalized on property produced by taxpayers. The possibility of mandating the use by all taxpayers of a single, uniform interest rate - in lieu of prescribing rules for self determination of a taxpayer's specific cost of indebtedness - was first broached at the public hearing on the proposed regulations under section 263A(f).

Background

As the principal association of corporate tax executives, TEI'S nearly 4,800 members are employed by 2,000 of the leading companies in North America and represent a cross-section of the business community. TEI is dedicated to the development and implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of tax administration and compliance. Above all, the Institute is committed to maintaining a tax system that works. Our members are charged with the responsibility of implementing the rules affecting their companies' tax liabilities and provide a balanced and important perspective on the issue of the determination of the appropriate interest rate to use for purposes of section 263A(f).

Discussion

1. Proposal. TEI applauds the Treasury for recognizing the complexity of the avoided cost interest calculation set forth in Prop. Reg. [section] 1.263A(f)-2 and for soliciting taxpayer's views on simplifying certain aspects of those calculations. In particular, we understand that the Treasury is considering substituting...