Rev. Rul. 73-305

The purpose of this Revenue Ruling is to update and restate the position set forth in Rev. Rul. 58-239, 1958-1 C.B. 94.

The issue relates to the application, by the Internal Revenue Service, of a partial payment of tax, penalty, and interest, assessed for one or more taxable periods, made by a taxpayer regularly employing the cash receipts and disbursements method of accounting. The specific question is whether the interest, if any, satisfied by such payment, is deductible for Federal income tax purposes in the year in which it is paid.

Section 163 of the Internal Revenue Code of 1954 provides that there shall be allowed as a deduction all interest paid within the taxable year on indebtedness.

Where additional taxes, penalty, and interest are assessed for one or more taxable periods against a taxpayer whose income is reported on the cash method of accounting, a partial payment thereon tendered to and accepted by the Internal Revenue Service with specific directions by the taxpayer as to its application will be applied in accordance with such directions. The amount of interest satisfied by such a partial payment will, to the extent of the taxpayer's liability, be deductible in computing taxable income for the year in which the payment is made.

Where additional taxes, penalty, and interest are assessed for one or more taxable periods and there are no specific instructions as to the application of the partial payment tendered by the taxpayer, the amount of the payment will be applied by the Service to tax, penalty, and interest, in that order, for the earliest period, then to tax, penalty, and interest, in that order, for the next succeeding period, until the payment is absorbed. The portion of the payment applied to interest for any period will be deductible in computing taxable income for the year in which the partial payment is made.

Amounts tendered in partial payment of taxes, penalty, and interest for one or more periods, mutually agreed to as to the amount but unassessed at the time of the tender, without instructions from the taxpayer as to the application of the payment, will be applied by the Service to tax, penalty and interest, in that order, for the earliest period, the interest to be computed under the applicable provisions of law, then to tax, penalty and interest, in that order, for the next succeeding period until the payment is absorbed. The tax, penalty, and interest will be immediately assessed and notice and demand issued for any unpaid tax, penalty, and interest due for any period. The portion of the payment applied to interest for any period will be deductible in computing taxable income for the year in which the partial payment is made.

For allocation of payments made pursuant to the terms of offers in compromise and collateral agreements that have been accepted by the Government in compromise of outstanding tax liabilities under section 7122 of the Code, see Rev. Rul. 73-304, page 42.

Rev. Rul. 58-239 is hereby superseded, since the position set forth therein is restated in this Revenue Ruling and Revenue Ruling 73-304, page 42.

This Revenue Ruling is applicable to all taxes under the Internal Revenue Code of 1954, except Alcohol, Tobacco, and Firearms taxes, withheld employment taxes, and collected excise taxes.