Comments on T.D. 8257 and INTL-304-89: interest allocation - transition rules, March 16, 1990.

Comments on T.D. 8257 and INTL-304-89: Interest Allocation - Transition Rules

On March 16, 1990, Tax Executives Institute filed comments with the Internal Revenue Service on the temporary and proposed regulations relating to the transition rules for the allocation and apportionment of interest expense under section 864(e) of the Internal Revenue Code. The Institute's comments, which were prepared under the aegis of the International Tax Committee, are reprinted below.

On August 1, 1989, the Internal Revenue Service issued temporary (T.D. 8257) and proposed (INTL-304-89) regulations concerning the transition rules for the allocation and apportionment of interest expense under section 864(e) of the Internal revenue Code.

The 1989 temporary regulations represent a revision of proposed regulations that were originally issued by the IRS on September 1, 1987 (INTL-935-86). See 1987-2 C.B. 43. Because the 1989 regulations are generally effective for taxable years beginning after December 31, 1986, taxpayers that followed the 1987 proposed regulations can find themselves facing an increase in their prior years' tax liability. Thus, the regulations retroactively penalize those taxpayers that relied in good faith on the 1987 proposed regulations. TEI submits that such a result is wrong and recommends that the 1989 regulations be applied on a prospective-only basis.

Discussion

Temp. Reg. [Sub-section] 1.861-13T provides transitional relief from the expense allocation rules of section 864(e) (which require taxpayers to allocate interest expense on a consolidated, rather than a separate-company, basis). The regulation also provides transitional relief from the consolidated approach to interest allocation for taxpayers that experienced net increases in total indebtedness during certain time periods. The relief is phased in over a four- and five-year period, depending upon the time period in which the net increase in indebtedness occurred. The provision is generally applicable for taxable years beginning after 1986.

The temporary regulations require taxpayers to use an average monthly debt level in computing the percentage of interest expense that is...