ACCRUAL AND THE TIME VALUE OF MONEY

INTEREST ACCRUAL AND THE TIME VALUE OF MONEY*
WALTER C. CLIFF"

PHILIP J. LEVINE** *

TABLE OF CONTENTS

Introduction ................................................ I. The Accrual Method as a Distortion of Income ......... A. The Commissioner's Broad Discretion Under Section 446(b) .................................... B. Use of the Accrual Method for Reporting Interest Deductions on Long-Term Obligations Clearly Reflects Income ............................. 1. Technical advice memoranda requiring application of the cash method ................. 2. An argument that the cash method must be applied ........................................ 3. Use of the accrual method does not constitute a distortion of income ...........................…show more content…
Taxpayers have, therefore, entered into transactions structured to accrue liability for deductible expenses prior to actual payment. Thus, taxpayers derive benefits in part from the time value of money, because eventually the taxpayer must either pay in full or reflect in taxable income-perhaps at capital gain rates-all the accrued amounts. Of particular concern to the Internal Revenue Service (the Service) has been the use of accrual accounting in connection with the deduction of interest on long-term debt under section 163 of the Internal Revenue Code (the Code).2 The Tax Reform Act of 1984 (the 1984 Act),3 which was signed into law by President Reagan onJuly 18, 1984, contains provisions specifically addressing this perceived abuse. Under section 461(a) of the Code, "[t]he amount of any deduction. . . shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income." 4 The accrual method, which is specifically authorized…show more content…
1977) (explanation of Rule of 78s); see also Rev. Rul. 83-84, 1983-1 C.B. 97 (explanation of Rule of 78s); Glickman, supra note 8, at 271-87 (discussing application ofRule of 78s); Winger, supra note 1, at 7 (example of Rule of 78s application). The Rule of 78s is computed on a sum-of-the-payment-periods digits basis. On a one-year loan with monthly payments, for example, the sum of the digits I through 12 is 78. DAVIDSON, SCINDLEt, STICKNEY & WELLS, supra, at 47. The following is an interest calculation under the Rule of 78s: a borrower takes out a 30-year loan, with annual interest payments calculated under tile Rule of 78s. To determine what part of each payment will constitute interest, the total amount of the interest will be multiplied by a fraction. The denominator of the fraction will always be 465-the sum of the integers.N through 30 (1 2 3. . . 30). The mathematical formula for I X(N+ 1 calculating the denominator is N 1). The numerator will be the number of payments remaining, including the present payment. Thus, the borrower would accrue 30/465 (or 6.45%) of the total interest in the first year, 29/465 (6.24%) in the second year, and so on until the 30th year, when 1/465 (.22%o) of the total interest would be accrued. See, e.g., SEN. COMM. PRINT, supra note 7, at 251 n.7 (example of Rule of 78s); H.R. REP. No. 432, 98th Cong., 2d Sess. 1243 n.7 (1984) (example of Rule of 78s) [hereinafter cited as