Potential opportunity to increase FTC use.

• Author: Smith, Annette B.
• Position: Foreign tax credits

Letter Ruling (TAM) 200212001 may be helpful to certain U.S. multinational corporations (MNCs) in limiting the amount of interest expense that otherwise may be apportioned to foreign-source income. A reduction in interest expense apportioned to foreign-source income should provide an MNC with the ability to use additional foreign tax credits (FTCs).

In the TAM, the IRS determined that non-interest-bearing trade accounts receivable were closely associated with the production of income created by the sale of goods and services (i.e., the accounts receivable were associated with income generated from the sale of goods and services). Accordingly, the Service concluded that the accounts receivable generated income from the sales of goods and services and were single-category assets under Temp. Regs. Sec. 1.861-9T(g)(3)(i).

In the taxpayer's particular facts, such sales were U.S.-source sales. Thus, the IRS determined that the accounts receivable were viewed properly as "U.S. assets" for purposes of determining the taxpayer's tax-basis balance sheet for interest-expense apportionment purposes.

The application of the Sec. 861 interest-expense apportionment rules to a taxpayer's accounts receivable may be considered under various scenarios. Accounts receivable might be viewed as:

* Assets without any identifiable yield and therefore excluded from the tax-basis balance-sheet equation for interest-expense apportionment purposes.

* Assets that generate interest income (assuming that they are interest-bearing). (Note: the accounts receivable in the TAM were non-interest-bearing. It is not apparent from the TAM whether interest-bearing accounts receivable would have changed the...