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Cheyenne Corporation is a U.S. corporation engaged in the manufacture and sale of mining equipment. The...

Cheyenne Corporation is a U.S. corporation engaged in the manufacture and sale of mining equipment. The company handles its export sales through sales branches in Canada and Mexico. The average tax book value of Cheyenne's assets for the year was $200 million, of which $100 million generated U.S. source income and $100 million generated foreign source income. Cheyenne's total interest expense for the year was $30 million. What amount of interest expense can Cheyenne apportion against its foreign source gross income for foreign tax credit purposes, assuming there is no limitation on the interest expense deduction?

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Answer #1

As per the TR 1.861, various subsections, assets are valued based on the tax basis of those assets, So here Cheyenne Corp uses the tax book value Method for interest expense allocation.

Cheyenne Corp (CC) has interest expense of $30 Million.

Adjusted basis of CC’s assets - $200 Million

— $100 Million generates US. Source income

— $100 Million generates foreign source income

CC uses tax book value method

Conclusion:

— Apportion to US. Source income: 30M x 100/200 = 15M

— Apportion to foreign source income: 30M x 100/200 = 15M

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