Magazine article The CPA Journal

No Deduction for Accrued Interest on Deferred Compensation -

Magazine article The CPA Journal

No Deduction for Accrued Interest on Deferred Compensation -

Article excerpt

December 1993, the Ninth Circuit Court of Appeals surprised quite a few people--especially at the IRS--when it allowed a taxpayer to deduct accrued but unpaid interest related to a deferred compensation plan. Following that decision, the IRS asked for a rehearing. The Court agreed, and has now reversed itself by agreeing with the IRS and the Tax Court that a current deduction is not available.

The IRS had disallowed the interest deduction on two grounds. Firstly, the IRS held that the accrued amounts were not interest because the taxpayer never properly borrowed the deferred compensation. The plan participants had no right to the compensation until the end of the compensation period. Secondly, the IRS held that the accrued amounts represented additional deferred compensation whose deduction was restricted by IRC Sec. 404. The Ninth Circuit, when it reversed the Tax Court, sided with the taxpayer's argument that the amounts were interest, holding that a legal right to possession wasn't necessary. In addition, the timing restrictions of IRC Sec. …

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