Interest deduction for noncorporate tax deficiencies

Article Abstract:

Legislative history and case law support the position that interest paid by noncorporate taxpayers on income tax deficiencies is not personal interest and is therefore wholly deductible under Sec. 163 in the computation of the adjusted gross income or net operating loss. This is manifested in the language in the 'Tippin' and 'Redlark' cases. However, in the 'Miller III' case, the Eighth Circuit court overlooked the legislative intent and previous case law in rejecting the interest deduction. While this issue has not yet been resolved, tax preparers should deduct the interest on tax deficiencies on Schedule E, with Form 8275-R attached to avoid the imposition of the accuracy-related penalty that is attributed to the disregard of rules or Regulations or to a significant understatement of income tax under Secs. 6662(b)(1) and (2), respectively. This form also avoids a penalty for understatement of liability under Sec. 6694.

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Interest not 'paid' when lender gave funds for payment

Article Abstract:

The Tax Court concluded in the 'Davison' case that a taxpayer did not pay interest when it made use of funds borrowed by the lender for the payment. The court followed the Fifth and Ninth Circuits in refusing a control-over-funds test for deductibility in this case. The Fifth Circuit rejected the test in 'Battelstein' while the Ninth Circuit followed suit in 'Wilkerson.' The Tax Court judged that the two circuit were justified in concentrating on the purpose of the loan if borrowed funds were applied to the satisfaction of the interest obligation. It found that there was no difference between directly increasing the debt from the lender to cover interest, particularly the payment of interest with a note, and borrowing funds from that lender for this purpose.

Loan servicing

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Income accrual cannot depend on billing customers

Article Abstract:

The Tax Court decided in 'Frank's Casing Crew and Rental Tools Inc.' that income accrued when a taxpayer fulfilled its contracts and not when it sent invoices afterward, although delays in billing were not its fault. For the 1988-1990 tax years, the oil field contractor was not able to bill $2.3 million in the year that a contract was performed because the third parties did not provide needed invoices on time. The court ruled that the taxpayer was required to accrue income when it completed a contract, under the all-events test contained in Reg. 1.466-1(c)(ii) and Reg. 1.451-1(a). The preparation and conveyance of an invoice were administrative tasks that did not delay the accrual of income when the taxpayer had performed its end of the bargain.

Taxation, Contractors, Collection (Accounting), Accrual basis accounting, Frank's Casing Crew and Rental Tools Inc.

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