Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-60

1972-1 C.B. 139

IRS Headnote

A modification in 1970 waiving originally stated interest in an installment sales contract executed in 1963 is a substantial change in the terms and a portion of each subsequent payment will be considered interest under section 483 of the Code.

Full Text

Rev. Rul. 72-60

Advice has been requested whether the modification of the terms of a promissory note under the circumstances described below will be considered a substantial change in the terms of a contract for purposes of section 483 of the Internal Revenue Code of 1954.

In January 1963, A sold land to B, who executed a promissory note in favor of A for the balance of the purchase price. The terms of the note provided for semi-annual payments in January and July of each year beginning in January 1964 and each year thereafter until July 1981, at which time the remaining unpaid principal balance and accrued interest thereon would be due and payable. The terms of the note also provided that there would be no accrual or payment of interest until January 1971, at which time interest would begin to accrue on the unpaid principal balance at the rate of three percent per annum, payable semi-annually, commencing July 1971.

In September 1970, A and B modified the terms of the note to provide that the interest as originally stated in the note was to be waived and that no interest was to be paid during the entire remaining period of the note.

Under the provisions of section 483 of the Code if a portion of the payments under a deferred payment sales contract that does not call for any interest or calls for an inadequate rate of interest may be treated as interest income rather than as part of the sales price. Section 483 of the Code applies to any payment on account of the sales or exchange of property, provided that: (1) the selling price, determined at the time of sale, is more than $3,000, (2) the payment constitutes part or all of the sales price, (3) under the contract of sale the payment is due more than six months after the date of the sale or exchange, (4) one or more payments are due more than one year after the date of the sale or exchange, and (5) under the terms of the contract, there is "total unstated interest" as that term is defined in section 483(b) of the Code.

Under section 1.483-1(d)(2) of the Income Tax Regulations section 483 of the Code does not apply in the case of a contract that provides for interest at the rate of at least four percent simple interest per annum, payable on each installment of principal at the time such installment is payable.

The Revenue Act of 1964, Public Law 88-272, C.B. 1964-1 (Part 2), 6, at page 52, which added section 483 to the Code, provides that section 483 is effective for payments made after December 31, 1963, on account of sales or exchanges of property occurring after June 30, 1963, other than any sale or exchange made pursuant to a binding written contract entered into before July 1, 1963. Section 1.483-1(b)(4) of the regulations provides that if there is a substantial change in the terms of such a contract, then any payments made pursuant to such changed contract shall not be considered as payments on account of a sale or exchange made pursuant to a contract entered into before July 1, 1963.

Although, in the instant case, the payments were made on account of a binding written contract entered into before July 1, 1963, the modification of the terms of the promissory note to waive all the interest is a substantial change in the terms of the contract within the meaning of section 1.483-1(b)(4) of the regulations.

Accordingly, it is held that the payments made after the date of the modification of the note will not be considered as payments made on account of a sale or exchange pursuant to a contract entered into before July 1, 1963. Therefore, section 483 of the Code will apply to payments made after the modification of the note and a portion of each such payment will be treated as interest rather than as part of the sales price. See section 1.483-1 of the regulations for the computation of this interest.