Example.
Asset | Average tax book value |
Plant and equipment | $315,000 |
Corporate headquarters | 60,000 |
Y stock | 75,000 |
Y note | 50,000 |
Total | 500,000 |
Y had $25,000 of income before the deduction of any interest expense. Of this total, $5,000 is high withholding tax interest income. The remaining $20,000 is derived from widget sales, and constitutes foreign source general limitation income. Assume that Y has no deductions from gross income other than interest expense. During 1990, Y paid $5,000 of interest expense to X on the Y note and $10,000 of interest expense to third parties, giving Y total interest expense of $15,000. X elects pursuant to § 1.861-9T to apportion Y's interest expense under the gross income method prescribed in section 1.861-9T (j) .
1985 | 1986-88 | 1989 | 1990 | |
(A) Related group indebtedness | $11,000 | 24,000 | 26,000 | 50,000 |
(B) Average Value of Assets of Related CFC | 100,000 | 200,000 | 200,000 | 250,000 |
(C) Related Group Debt-to-Asset Ratio | .11 | .12 | .13 | .20 |
(.11 + .12 + .12 + .12 + .13) / 5 = .12
$250,000 * .12 = $30,000.
$50,000 - $30,000 = $20,000
X's related group indebtedness of $50,000 for 1990 is greater than its allowable related group indebtedness of $24,000 for 1989 (assuming a foreign base period ratio in 1989 of .12), and X's related group debt-to-asset ratio for 1990 is .20, which is greater than the ratio of .10 described in paragraph (e)(2)(vii)(B) of this section. Therefore, X's excess related group indebtedness for 1990 remains at $20,000.
1985 | 1986 | 1987 | 1988 | 1989 | 1990 | |
(1) | $231,400 | 225,000 | 225,000 | 225,000 | 220,800 | 249,600 |
(2) | 445,000 | 450,000 | 450,000 | 450,000 | 460,000 | 480,000 |
(a) | ||||||
(3) | .52 | .50 | .50 | .50 | .48 | .52 |
X's "U.S. base period ratio" for 1990 is:
(.52 + .50 + .50 + .50 + .48) / 5 = .50
X's "allowable indebtedness" for 1990 is:
$480,000 * .50 = $240,000
X's "excess U.S. shareholder indebtedness" for 1990 is:
$249,000 - $240,000 = $9,600
X's debt-to-asset ratio for 1990 is .52, which is greater than the ratio of .10 described in paragraph (e)(3)(vii) of this section. Therefore, X's excess U.S. shareholder indebtedness for 1990 remains at $9,600.
$5,000 * $9,600 / $50,000 = $960
Foreign source high withholding tax interest income
= $5,000 - [($15,000) multiplied by ($5,000)/($5,000 + $20,000)]
= $2,000
and
Foreign source general limitation income
= $20,000 - [($15,000) multiplied by ($20,000)/($5,000 + $20,000)]
= $8,000.
Reduction of X's assets generating foreign source general limitation income:
Reduction of X's assets generating foreign source high withholding tax interest income:
26 C.F.R. §1.861-10