rp-03-37.pdf

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Part III
Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement;
determination of correct tax liability.
(Also Part I, §§ 864; 1.861-8T; 1.861-9T.)

Rev. Proc. 2003-37

SECTION 1. PURPOSE

This revenue procedure describes documentation and information a taxpayer that
uses the fair market value method of apportionment of interest expense may prepare
and make available to the Internal Revenue Service (“Service”) upon request in order to
establish the fair market value of the taxpayer’s assets to the satisfaction of the
Commissioner as required by §1.861-9T(g)(1)(iii). It also sets forth the procedures to be
followed in the case of elections to use the fair market value method.

SECTION 2. BACKGROUND

Section 901 of the Internal Revenue Code (“Code”) allows taxpayers to elect to
receive a credit, subject to the limitations of section 904, for any income, war profits,
and excess profits taxes paid or accrued during the taxable year to any foreign country
or to any possession of the United States. Section 904 generally limits the amount of
credit taken under section 901 to the portion of the taxpayer’s U.S. tax attributable to the

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taxpayer’s taxable income from sources without the United States.

Sections 862(b) and 863(a) provide that taxable income attributable to gross income
from foreign sources shall be determined by deducting the expenses, losses, and other
deductions properly apportioned or allocated thereto and a ratable part of any
expenses, losses, and other deductions that cannot be definitely allocated to some item
or class of gross income. Section 864(e)(2) provides that all allocations and
apportionments of interest expense must be made on the basis of assets rather than
gross income. Sections 1.861-8T and 1.861-9T provide general rules governing the
asset method of interest expense apportionment, and §§1.861-8T(c)(2) and 1.861-
9T(g)(1)(ii) provide that a taxpayer apportions its interest expense on the basis of the
tax book value of its assets or, at the election of the taxpayer, the fair market value of its
assets. Under both methods, §1.861-9T(g)(3) requires assets to be characterized
according to the source and type of income that they generate, have generated, or may
reasonably be expected to generate.

Section 1.861-9T(g)(1)(iii) requires a taxpayer that elects to apportion its interest
expense using the fair market value method to establish the fair market value of its
assets to the satisfaction of the Commissioner for each taxable year. If a taxpayer fails
to establish the fair market value of an asset to the satisfaction of the Commissioner,
the Commissioner may determine the appropriate asset value. If a taxpayer fails to
establish the value of a substantial portion of its assets to the satisfaction of the
Commissioner, the Commissioner may require the taxpayer to use the tax book value
method. Section 1.861-9T(h) provides specific rules for valuing assets for taxpayers
that use the fair market value method of interest expense apportionment.

SECTION 3. DOCUMENT AND INFORMATION REQUIREMENTS

.01 If a taxpayer satisfies the requirements of sections 3.02 and 3.03 of this revenue
procedure regarding the preparation and production of documents and other information
relating to valuation of assets and the Commissioner determines that the taxpayer’s
valuation of an asset is reasonable, then the taxpayer will have established the fair
market value of the asset to the satisfaction of the Commissioner pursuant to §1.861-
9T(g)(1)(iii).

.02 A taxpayer satisfies the requirements of this section 3.02 if the taxpayer prepares
and makes available to the Service upon request a narrative statement describing the
apportionment of interest expense under the fair market value method in sufficient detail
such that the Service can reconcile the information on Schedule H of Form 1118 with
such apportionment methodology, which narrative statement incorporates or is
accompanied by the following information:

(a) A description of how the taxpayer calculated the aggregate value of the
taxpayer’s assets on the last day of its taxable year. In the case of a publicly

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traded corporation, the taxpayer must describe how the taxpayer calculated the
aggregate trading value of stock traded on established securities markets at
year-end and how the taxpayer calculated year-end liabilities to unrelated
persons and pro rata share of year-end liabilities of all related persons owed to
unrelated persons as required by §1.861-9T(h)(1)(i). In the case of a corporation
that is not publicly traded, the taxpayer must describe how the taxpayer
calculated the aggregate value of its assets by reference to the capitalization of
corporate earnings as required by §1.861-9T(h)(1)(i).
(b) A description, by entity, of tangible assets referred to in §1.861-9T(h)(1)(ii). With
respect to assets that have significant value or that generate significant income,
the description must include detailed information for the asset. For example, with
respect to real property, the description should include location, zoning, and
square footage.
(c) An explanation of company structure and an identification of cost centers or other
reporting divisions or units to which assets are assigned.
(d) A description of the valuation techniques used to value tangible assets and the
reasons for selecting such valuation techniques over alternative techniques. Any
valuation study relied upon by the taxpayer must include an explanation
describing the valuation of the tangible assets as set forth in §1.861-9T(h)(1)(ii) in
detail sufficient to enable the Service, upon examination, to duplicate the
methodology used to obtain those fair market values. The taxpayer must also
provide a description of all assumptions made in applying the valuation
techniques used in the study, including but not limited to, discount rates,
obsolescence factors, and risk adjustments.
(e) An explanation of the manner in which tangible assets were combined into
reasonable groupings and the reasons for such grouping.
(f) An identification of any fungible property, such as commodities, that was valued
using statistical methods of valuation, and an explanation of such methods.
(g) A description of the apportionment of interest expense to intangible asset values
as computed under §1.861-9T(h)(1)(iii).

.03 If the taxpayer or a third party used any computer software to determine asset
values, characterize assets in accordance with §1.861-9T(g)(3), or calculate the
taxpayer’s foreign tax credit limitation, the taxpayer satisfies the requirements of this
section 3.03 if the taxpayer makes available to the Service upon request the following:

(a) Any computer software executable code used for such purposes, including an
executable copy of the version of the software used in the preparation of the
taxpayer’s return (including any plug-ins, supplements, etc.), and a copy of all
related electronic data files. Thus, if software subsequently is upgraded or
supplemented, a separate executable copy of the version used in preparing the
taxpayer’s return must be retained.
(b) Any related computer software source code acquired or developed by the
taxpayer or a related person, or primarily for internal use by the taxpayer or such

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person rather than for commercial distribution.
(c) In the case of any spreadsheet software or similar software, any formulae or links
to supporting worksheets.

For these purposes, “software,” “computer software executable code,” and “computer
software source code” have the meanings provided for those terms under section
7612(d). For example, computer software executable code includes any related user
manuals or similar documentation. Finally, nothing in this revenue procedure shall
affect the limitations and protections applicable to summonses for software under
section 7612, or the authority of the Commissioner generally to issue a summons for
information in accordance with subchapter A of Chapter 78 of the Code.

SECTION 4. USE OF FAIR MARKET VALUE METHOD

.01 A taxpayer may elect to use the fair market value method with respect to any
taxable year for which the statute of limitations has not closed. However, an election to
use the fair market value method that is not made until an audit of the taxable year to
which the election relates has commenced, or a taxpayer’s failure to provide timely the
documentation and other information supporting the valuation of the taxpayer’s assets,
creates administrative difficulties for the Service. Accordingly, section 4 of this revenue
procedure sets forth the procedures the Service will follow in the case of taxpayers
using the fair market value method and the actions it will request of taxpayers.

.02 In the case of a taxpayer that has made an election to use the fair market value
method prior to the opening conference for the audit of the taxable year to which the
election relates or who makes such an election within 90 days of such opening
conference, if the Service issues a written information document request asking the
taxpayer to provide the documents and other information described in sections 3.02 and
3.03 of this revenue procedure and the taxpayer complies with such request within 30
days of the request, then the Service will complete its examination, if any, with respect
to the taxpayer’s method of interest expense apportionment for that year as part of the
current examination cycle. If the taxpayer does not provide the documents and
information described in sections 3.02 and 3.03 within 30 days of the request, then the
procedures described in section 4.03 of this revenue procedure shall apply.

.03 If a taxpayer makes an election to use the fair market value method more than
90 days after the opening conference for the audit of the taxable year to which the
election relates or the taxpayer does not provide the documents and information as
requested in accordance with section 4.02 of this revenue procedure, then the Service
will in a separate cycle determine whether an examination of the taxpayer's method of
interest expense apportionment is warranted and complete any such examination. The
separate cycle will be worked as resources are available and may not have the same
estimated completion date as the other issues under examination for the taxable year.
The Service may ask the taxpayer to agree to extend the statute of limitations on

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assessment and collection for the taxable year to permit examination of the taxpayer’s
method of interest expense apportionment, including an extension limited, where
appropriate, to the taxpayer’s method of interest expense apportionment.

.04 For a taxable year for which the taxpayer and the Service have agreed to use the
Limited Issue Focused Exam (LIFE) process announced in IR 2002-133 (December 4,
2002), the time periods agreed to in that process shall apply for purposes of both the
election to use the fair market value method and the provision of documents and other
information with respect to such method.

SECTION 5. EFFECTIVE DATE

Section 3 of this revenue procedure is effective for taxpayers using the fair market
value method for taxable years ending after May 7, 2003. Section 4 of this revenue
procedure is effective for fair market value method elections relating to taxable years for
which the opening conference of the audit occurs more than 30 days after May 7, 2003.

SECTION 6. PAPERWORK REDUCTION ACT

The collection of information contained in this revenue procedure has been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1833.

An agency may not conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection of information displays a valid OMB
control number.

The collection of information in this revenue procedure is in section 3, under which
taxpayers may prepare and make available to the Commissioner upon request the
documents and other information described therein in order for the Commissioner to
make a determination regarding whether a taxpayer’s valuation of an asset is
reasonable. This information will be used by revenue agents to assist in determining if
the taxpayer has established the fair market value of the taxpayer’s assets to the
satisfaction of the Commissioner. The likely respondents are multinational businesses
or other for-profit institutions.

The estimated total annual reporting and/or recordkeeping burden is 625 hours. The
estimated annual burden per respondent/recordkeeper is an estimated average of 5
hours. The estimated number of respondents and/or recordkeepers is 125. The
estimated frequency of response is on occasion.

Books or records relating to a collection of information must be retained as long as
their contents may become material in the administration of any internal revenue law.
Generally tax returns and tax return information are confidential, as required by 26

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U.S.C. 6103.

SECTION 7. DRAFTING INFORMATION

The principal author of this revenue procedure is Melissa Arndt of the Office of the
Associate Chief Counsel (International). For further information regarding this revenue
procedure contact Ms. Arndt on (202) 622-3850 (not a toll-free call).