Rev. Rul. 59-260

Advice has been requested concerning the taxable period in which the excess of the redemption price of non-interest-bearing obligations over the issuance price thereof at a discount may be deducted by a taxpayer employing the cash method of accounting.

A taxpayer employing the cash method of accounting issued at a discount, registered, nontransferable, nonassignable, and noninterest-bearing ten-year `Thrift Certificates', under an obligation to redeem at the par amount specified therein, at maturity, or at a lesser amount if redemption occurs earlier than the maturity date. The certificates increase in value by specified progressively higher amounts at stated intervals, but the increments in value are payable only upon surrender of the certificates.

Section 163(a) of the Internal Revenue Code of 1954 provides the general rule that there shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness. Section 461(a) of the Code provides the general rule that the amounts of any deduction or credit allowed by subtitle A of the Code, relating to income taxes, shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.

The excess of the redemption price over the issuance price of the certificates, whether at or before maturity, constitutes discount sustained upon the funds borrowed, or the equivalent of interest expense to be paid for the use of the loan proceeds. United States v. Barron G. Collier , 104 Fed.(2d) 420.

Under the provisions of section 1.461-1 of the Income Tax Regulations, a deduction for interest by a taxpayer using the cash method of accounting is allowable only in the taxable year in which payment thereof is made. Therefore, the interest expense in the instant case is allowable as a deduction only in the taxable year in which the certificates are redeemed. See Massachusetts Mutual Life Insurance Co. v. United States , 288 U.S. 269, Ct.D. 638, C.B. XII-1, 286 (1933), and John C. Cleaver v. United States , 158 Fed.(2d) 342, certiorari denied, 330 U.S. 849.

Accordingly, it is held that a taxpayer, employing the cash method of accounting, may deduct as interest expense the excess of the redemption price of non-interest-bearing obligations over the issuance price thereof at a discount, only in the taxable year such interest is paid upon redemption of the obligations.