Rev. Rul. 58-239

Advice has been requested relative to the application, by a District Director of Internal Revenue, of a partial payment of tax, penalty and interest, assessed for one or more years, made by a taxpayer regularly employing the cash receipts and disbursements method of accounting, and whether the interest, if any, satisfied by such partial payment is deductible for Federal income tax purposes in the year in which it is paid.

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

Where an assessment is made for one or more years 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 District Director first to tax, penalty and interest, in that order, for the earliest year, then to tax, penalty and interest, in that order, for the next succeeding year, until the payment is absorbed. The portion of the payment applied to interest for any year will be deductible in computing taxable income for the year in which the partial payment is made.

Amounts tendered, in partial payment of deficiencies mutually agreed to as to the amount of liability but unassessed at the time of the tender, for one or more years, without instructions from the taxpayer, as to the application of the payment, will be applied by the District Director first to tax, penalty and interest, in that order, due for the earliest year, the interest to be computed under the applicable provisions of law, then to tax, penalty and interest, in that order, for the next succeeding year until the payment it absorbed. The deficiencies and interest will be immediately assessed and notice and demand issued for any unpaid tax and interest due for any year. The portion of the payment applied to interest for any year will be deductible in computing taxable income for the year in which the partial payment is made. However, where a lump sum is accepted in compromise of tax, penalty and interest, which sum is less than the principal amount of the tax and penalty claimed by the Government, no part of the amount of such compromise is deductible as interest. See I. T. 3852, C. B. 1947-1, 15.