Rev. Proc. 83-40

Section 1. Purpose

The purpose of this revenue procedure is to set forth an acceptable method of accounting for interest on short-term consumer loans when the terms of the indebtedness state that interest is computed or earned in accordance with the Rule of 78's method or is treated as earned in such manner if the indebtedness is prepaid.

Sec. 2. Application

In a typical short-term consumer loan transaction, the Service will accept the Rule of 78's method for computing the borrower's interest deduction and the lender's interest income as a matter of administrative convenience. This is an administrative exception to the general rule that disallows the Rule of 78's method as a proper method of accounting for interest on indebtedness. See Rev. Rul. 83-84, page 97, this Bulletin. This exception for consumer loans will apply only when there is a self-amortizing loan that requires level payments, at regular intervals at least annually, over a period not in excess of five years (with no balloon payment at the end of the loan term), and when the loan agreement provides that interest is earned, or upon the prepayment of the loan interest is treated as earned, in accordance with the Rule of 78's method.

Sec. 3. Effect on other Documents

This revenue procedure should be considered in conjunction with Rev. Rul. 83-84, page 97, this Bulletin, which modifies and supersedes Rev. Rul. 72-100, 1972-1 C.B. 122.