Rev. Rul. 77-417

Advice has been requested whether, under the circumstances described below, certain charges levied on customer credit card accounts by a bank under a credit card plan are deductible as interest under section 163 of the Internal Revenue Code of 1954.

A bank operates a credit card plan under which retail customers may purchase goods and services from participating merchants by using the bank's credit card. In addition to using their cards for purchases, cardholders may obtain cash advances, check advances, and overdraft advances against their credit card accounts. A cash advance may be obtained by presenting the credit card at certain banks. A check advance may be obtained by writing a check on a special check provided by the bank for that purpose. An overdraft advance (or transfer advance) is available only to cardholders who have checking accounts with the bank. To obtain an overdraft advance, the cardholder writes a check on the cardholder's regular checking account in an amount that exceeds the balance in the account. The bank then transfers the amount of the overdraft, but no less than $5, to the cardholder's regular checking account.

At the time the advance is made, the amount of a cash, check, or overdraft advance is added to the cardholder's credit card account balance and the bank charges the cardholder's account with a one-time charge of 2 percent of the amount of each new cash advance and 1 percent of the amount of each new check advance and overdraft advance. Each type of advance is subject to a minimum charge of $1 for each new advance. These one-time charges are in addition to the monthly finance charge that the bank levies on accounts only in the event full payment of the account balance is not made within 25 days from the statement billing date. No part of the monthly finance charge is for service charges, loan fees, credit investigation fees, or similar charges, and it, therefore, qualifies as interest under Rev. Rul. 71-98, 1971-1 C.B. 57, as modified by Rev. Rul. 72-315, 1972-1 C.B. 49. No part of the one-time charge is attributable to services performed by the bank in connection with the cardholder's account.

Section 163(a) of the Code allows a deduction for all interest paid or accrued within the taxable year on indebtedness. For tax purposes, interest has been defined by the Supreme Court of the United States as the amount one has contracted to pay for the use of borrowed money and as the compensation paid for the use or forebearance of money. See Old Colony Railroad Co. v. Commissioner, 284 U.S. 552 (1932), XI-1 C.B. 274 (1932), and Deputy v. DuPont, 308 U.S. 488 (1940), 1940-1 C.B. 118. A negotiated bonus or premium paid by a borrower to a lender in order to obtain a loan has been held to be interest for Federal income tax purposes. L-R Heat Treating Co., 28 T.C. 894 (1957).

The payment or accrual of interest for tax purposes must be incidental to an unconditional and legally enforceable obligation of the taxpayer claiming the deduction. Autenreith v. Commissioner, 115 F.2d 856 (3d Cir. 1940). The fact that an amount paid is a flat sum paid in addition to a stated periodic interest rate and is a one-time charge does not preclude a finding that it is interest for purposes of section 163 of the Code. However, to qualify as interest for tax purposes, the payment must be compensation for the use or forebearance of money and not a payment for specific services performed by the lender in connection with the borrower's account. Rev. Rul. 69-188, 1969-1 C.B. 54; Rev. Rul. 74-187, 1974-1 C.B. 48.

In the instant case, the cash advance, check advance, and overdraft advance charges are made for the use or forebearance of money and are not made for services rendered by the bank. Accordingly, these charges are deductible as interest under section 163(a) of the Code in the year in which paid or accrued.