Academic journal article Journal of Accountancy

Avoiding Group Interest Allocation

Academic journal article Journal of Accountancy

Avoiding Group Interest Allocation

Article excerpt


Ford Motor Company has limited the impact of the 1986 Tax Reform Act's consolidated interest expense allocation rules by deconsolidating its highly leveraged subsidiary.

Under those rules, interest expense incurred by one member of an affiliated group can be allocated to the foreign source income of another member. Consequently, the ratio of foreign source to U.S. source taxable income can be reduced in computing the foreign tax credit limitation of the group. The result is a reduction in available foreign tax credits.

Before the 1986 act, interest expense was allocated only between the U.S. and foreign source income of the affiliated group member that actually did the borrowing. Affiliated groups were thus able to isolate their borrowings in those corporations with only U.S. assets and income. Interest expense then was allocated only against U.S. source income.

Ford has two businesses: manufacturing (principally automotive-related) and financial services. The financial services business is highly leveraged and produces primarily U.S. source income, while the manufacturing business is less leveraged and produces a substantial amount of foreign source income. The new rules would allocate a portion of the finance business's interest expense to the foreign source income generated by the manufacturing business.

To avoid this, Ford placed its financial services subsidiaries under a subsidiary holding company. …

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