Rev. Rul. 80-157

Rev. Rul. 79-72, 1979-1 C.B. 278, states that holders of 6-month non-negotiable time deposit certificates constructively receive at the end of their taxable year the amount of interest that they would have received if the certificate had been redeemed at that time even though such redemption would have reduced the interest rate from 9 to 5 percent and also caused forfeiture of 3 months' interest. Rev. Rul. 79-72 also holds that the 6-month certificate is issued with original issue discount that is deductible ratably by the issuer under section 1.163-4 of the Income Tax Regulations over the term of the certificate.

Section 1.451-2(a)(2) of the regulations, adopted by T.D. 7663, page 101, this Bulletin, provides that the fact that the taxpayer, by withdrawing the earnings during the taxable year, would receive earnings that are substantially less in comparison with the earnings for the corresponding period to which the taxpayer would be entitled had the taxpayer left the account on deposit until a later date is a substantial limitation on the taxpayer's control over the receipt of such earnings and would preclude constructive receipt thereof.

Section 1.1232-3(b)(1)(iii) of the regulations, adopted by T.D. 7663, provides, in effect, that amounts earned on the 6-month certificates in Rev. Rul. 79-72 will not generally be treated as original issue discount.

Therefore, in view of the amendments to the regulations set out above, interest income on the type of 6-month certificates described in Rev. Rul. 79-72 which is not credited or made available for the holder to withdraw before maturity of the certificate without penalty, is not includible in the gross income of holders who use the cash receipts and disbursements method of accounting before the certificates are redeemed or mature. Furthermore, issuers who use the cash receipts and disbursements method of accounting will not be allowed to deduct this interest until it is paid or credited to the holders.

However, in other types of certificates in which interest is credited monthly or quarterly and can be withdrawn immediately without penalty, even though the principal cannot be withdrawn without penalty until maturity of the certificates, the interest must be included in the holder's gross income for the taxable year credited to the account of the holder or made available for withdrawal by the holder.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 79-72 is superseded effective December 31, 1978, except for those taxpayers that used the ratable deduction rule pursuant to section 1.163-4 of the regulations with respect to the obligations described in Rev. Rul. 79-72 for their last taxable year beginning before September 19, 1978, as well as those taxpayers that properly applied for and received permission to change to this method of accounting with respect to such obligations for their last taxable year beginning before September 19, 1978. For those taxpayers Rev. Rul. 78-72 is superseded for taxable years beginning after September 18, 1979.

For those taxpayers who for the first time issued short-term obligations described in Rev. Rul. 79-72 and who use the ratable deduction rule in taxable years beginning after December 31, 1978, Rev. Rul. 79-72 is superseded as of December 31, 1978.

Any change in the taxpayer's present method of accounting to comply with the amendments made to the above cited regulations by T.D. 7663 is a change in the method of accounting to which the provisions of section 446 of the Code and the applicable regulations thereunder apply.