Qwan, a U.S. corporation, reports $250,000 interest expense for the tax year. None of the interest relates to nonrecourse debt or loans from affiliated corporations. Qwan's U.S. and foreign assets are reported as follows. Fair market value: U.S. assets $ 5,000,000 Foreign assets $10,000,000 Tax book value: U.S. assets $ 2,000,000 Foreign assets $ 6,000,000 How should Qwan assign its

Question

interest expense between U.S. and foreign sources to maximize its FTC for the current year?
a. Using tax book values.
b. Using tax book value for U.S. source and fair market value for foreign source.
c. Using fair market values.
d. Using fair market value for U.S. source and tax book value for foreign source.

Answer 1

c
RATIONALE: The taxpayer is required to use either the fair market value or the tax book value of the assets to allocate and apportion the interest expense between U.S. and foreign sources. The taxpayer may not use a mix of the methods. The taxpayer should use the method that generates the largest FTC numerator, i.e., the smallest foreign-source interest deduction.

The FMV method produces this result.

Tax book value method

$250,000 × [$2,000,000/($2,000,000 + $6,000,000)] = $62,500 interest expense allocated and apportioned to U.S.-source income, with the remainder of $187,500 allocated and apportioned to foreign-source income.

Fair market value method

$250,000 × [$5,000,000/($5,000,000 + $10,000,000)] = $83,333 interest expense allocated and apportioned to U.S.-source income, with the remainder of $166,667 allocated and apportioned to foreign-source income.