REVENUE RULING 58-225
1958-1 C.B 258, in effect declared obsolete in ILM 200019041

[IRS Annotation]
Interest collected in advance constitutes taxable income in the year received, even though the lender employs the accrual method of accounting and is required by state authorities to report only earned interest as income and to set up reserves for unearned interest.

[Rev. Rul. 58-225]
Advice has been requested regarding the treatment of interest collected in advance by insurance companies on outstanding loans in cases where the companies are required by state authorities to report only earned interest as income and to set up reserves for unearned interest.

A life insurance company, employing the accrual method of accounting, made loans to policyholders on which interest was paid to the company annually in advance. The insurance commissioner of the state required the company to report, as income, the earned interest on outstanding loans and to set up a reserve for unearned [259] interest as of December 31st of each year. The specific question presented is whether the unearned interest received during a taxable year is includible in gross income for the year in which received.

In North American Oil Consolidated v. David Burnet, 286 U.S. 417, Ct. D. 499, C.B. XI-1, 293 (1932), it was held in part that "If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, * * *." The principle of the North American Oil Consolidated case is equally applicable to the facts in the instant case.

Accordingly, interest collected in advance constitutes taxable income in the year received, even though the lender employs the accrual method of accounting and is required by state authorities to report earned interest as income and to set up reserves for unearned interest.