Legal Ruling 1958-59

Interest: Federal Tax Deficiencies

The deduction of interest on Federal tax deficiencies is subject to the limitations set by section 24344 of the Bank and Corporation Tax Law.

Advice is requested as to whether the deduction of interest on Federal tax deficiencies is subject to the limitations set by section 24344 of Bank and Corporation Tax Law.

Interest on tax deficiencies is sufficiently similar to interest on borrowing so that like treatment under the statute is justified. Interest means "compensation for the use or forbearance of money." Deputy v du Pont, 308 U.S. 488. Thus, interest on tax deficiencies is compensation for the use of money which should have been paid earlier to the government, or for the forbearance of the government to demand such money until the additional assessment was made. For the period during which such money was retained, the taxpayer was possessed of capital in excess of that which it owned outright, just as if it had borrowed such amount of money for such period. Further reason for not allowing interest on taxes to be deducted free of any limitation is that the federal income tax liability upon which the interest accrued may be related in part, at least, to items of income no part of which was included in the measure of the California tax. Thus, a limitation is called for and it is provided for in section 24344.