B-75530, MAY 20, 1948, 27 COMP. GEN. 715

B-75530: May 20, 1948

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1948: REFERENCE IS MADE TO A LETTER OF APRIL 14. IT IS STATED IN THE LETTER THAT. ADVANCES HAVE BEEN MADE TO THE FUND BEGINNING WITH THE FISCAL YEAR 1933 AND THAT THE FIRST REPAYMENT TO APPLY ON INTEREST DUE WAS MADE DURING THE FISCAL YEAR 1933. WHILE THE FIRST REPAYMENT TO BE APPLIED ON PRINCIPAL WAS MADE DURING THE FISCAL YEAR 1945. IT IS STATED FURTHER THEREIN AS FOLLOWS: INTEREST AT THE RATE OF 3 PERCENTUM PER ANNUM HAS BEEN (1) CHARGED ON ADVANCES TO THE FUND. SINCE REPAYMENTS IN EXCESS OF INTEREST REQUIREMENTS ARE NOW BEING MADE TO THE TREASURY. YOUR DECISION IS REQUESTED AS TO WHETHER OR NOT THE METHOD WHICH WAS USED IN COMPUTING INTEREST DUE ON THE FUND SHOULD BE CONTINUED. (2) PAYMENTS WHICH DO NOT EQUAL THE ACCRUED INTEREST WOULD LEAVE THE PRINCIPAL UNDIMINISHED UNTIL OTHER PAYMENTS ARE MADE WHICH ARE SUFFICIENT TO COVER ALL INTEREST ACCRUED DURING THE YEAR.

B-75530, MAY 20, 1948, 27 COMP. GEN. 715

INTEREST - ADVANCES TO COLORADO RIVER DAM FUND IN THE COMPUTATION AND COLLECTION OF INTEREST CHARGES ON TREASURY ADVANCES TO THE COLORADO RIVER DAM FUND MADE PURSUANT TO THE BOULDER CANYON PROJECT ACT, WHICH ACT REQUIRES THE CAPITALIZATION OF DEFERRED INTEREST EARNINGS AND THEREFORE CONTEMPLATES FINANCING THROUGH AN ACCOUNT SHOWING A SINGLE OUTSTANDING AMOUNT, THE " UNITED STATES RULE" OF APPLYING REPAYMENTS FIRST TO THE LIQUIDATION OF INTEREST AND THEN TO THE DISCHARGE OF THE PRINCIPAL WOULD NOT BE APPLICABLE, AND SHOULD NOT BE USED IN PLACE OF THE PRESENT TREASURY METHOD OF APPLYING REPAYMENTS TO THE REDUCTION OF THE OUTSTANDING BALANCE THAT INCLUDES THE CAPITALIZED INTEREST.

COMPTROLLER GENERAL WARREN TO THE SECRETARY OF THE TREASURY, MAY 20, 1948:

REFERENCE IS MADE TO A LETTER OF APRIL 14, 1948, FROM THE FISCAL ASSISTANT SECRETARY, CONCERNING THE CORRECT METHOD OF COMPUTING AND COLLECTING INTEREST CHARGES ON ADVANCES MADE BY THE TREASURY DEPARTMENT TO THE COLORADO RIVER DAM FUND, CREATED BY SECTION 2 (A) OF THE BOULDER CANYON PROJECT ACT, 45 STAT. 1057.

IT IS STATED IN THE LETTER THAT, PURSUANT TO THE AUTHORITY OF SAID ACT, ADVANCES HAVE BEEN MADE TO THE FUND BEGINNING WITH THE FISCAL YEAR 1933 AND THAT THE FIRST REPAYMENT TO APPLY ON INTEREST DUE WAS MADE DURING THE FISCAL YEAR 1933, WHILE THE FIRST REPAYMENT TO BE APPLIED ON PRINCIPAL WAS MADE DURING THE FISCAL YEAR 1945. IT IS STATED FURTHER THEREIN AS FOLLOWS:

INTEREST AT THE RATE OF 3 PERCENTUM PER ANNUM HAS BEEN (1) CHARGED ON ADVANCES TO THE FUND, (2) CHARGED ON THE ACCOUNT OUTSTANDING AT THE END OF EACH OPERATING YEAR (INCLUDING ACCRUED AND UNPAID INTEREST), AND (3) CREDITED ON REPAYMENTS MADE TO THE TREASURY DURING THE YEAR.

SINCE REPAYMENTS IN EXCESS OF INTEREST REQUIREMENTS ARE NOW BEING MADE TO THE TREASURY, YOUR DECISION IS REQUESTED AS TO WHETHER OR NOT THE METHOD WHICH WAS USED IN COMPUTING INTEREST DUE ON THE FUND SHOULD BE CONTINUED, OR WOULD IT BE MORE APPROPRIATE IF (1) PAYMENTS DURING THE YEAR WOULD FIRST BE PRINCIPAL ( UNITED STATES RULE, MODIFIED TO THE EXTENT OF COMPUTING INTEREST ON A COMPOUNDED BASIS AS REQUIRED BY THE AFOREMENTIONED LAW); (2) PAYMENTS WHICH DO NOT EQUAL THE ACCRUED INTEREST WOULD LEAVE THE PRINCIPAL UNDIMINISHED UNTIL OTHER PAYMENTS ARE MADE WHICH ARE SUFFICIENT TO COVER ALL INTEREST ACCRUED DURING THE YEAR; AND (3) ANY EXCESS REMAINING AFTER THE PAYMENTS EXCEED THE ACCRUED INTEREST WOULD BE APPLIED TO THE PRINCIPAL.

A RETROACTIVE APPLICATION OF THE UNITED STATES RULE IN THIS CASE WILL RESULT IN AN ADDITIONAL INTEREST CHARGE OF $272,432.23. ACCORDINGLY, IF IT IS DETERMINED THAT THE APPLICATION OF THE UNITED STATES RULE SHOULD BE ADOPTED IN COMPUTING SUCH INTEREST, YOUR DECISION IS REQUESTED ALSO AS TO WHETHER OR NOT ADJUSTMENTS SHOULD BE MADE RETROACTIVELY TO THE BEGINNING OF THE ACCOUNT TO CONFORM TO THIS RULE, OR WHETHER OR NOT THIS RULE SHOULD BE APPLIED ONLY TO CURRENT INTEREST COMPUTATIONS ON THE FUND.

THE BOULDER CANYON PROJECT ACT, 45 STAT. 1057, 1058, PROVIDES, INSOFAR AS IS HERE PERTINENT, THAT:

SEC. 2 (A) THERE IS HEREBY ESTABLISHED A SPECIAL FUND, TO BE KNOWN AS THE " COLORADO RIVER DAM FUND" * * *.

(B) THE SECRETARY OF THE TREASURY IS AUTHORIZED TO ADVANCE TO THE FUND, FROM TIME TO TIME AND WITHIN THE APPROPRIATIONS THEREFOR, SUCH AMOUNTS AS THE SECRETARY OF THE INTERIOR DEEMS NECESSARY FOR CARRYING OUT THE PROVISIONS OF THIS ACT, EXCEPT THAT THE AGGREGATE AMOUNT OF SUCH ADVANCES SHALL NOT EXCEED THE SUM OF $165,000,000. * * * INTEREST AT THE RATE OF 4 PERCENTUM PER ANNUM ACCRUING DURING THE YEAR UPON THE AMOUNTS SO ADVANCED AND REMAINING UNPAID SHALL BE PAID ANNUALLY OUT OF THE FUND, EXCEPT AS HEREIN OTHERWISE PROVIDED.

(D) THE SECRETARY OF THE TREASURY SHALL CHARGE THE FUND AS OF JUNE 30 IN EACH YEAR WITH SUCH AMOUNT AS MAY BE NECESSARY FOR THE PAYMENT OF INTEREST ON ADVANCES MADE UNDER SUBDIVISION (B) AT THE RATE OF 4 PERCENTUM PER ANNUM ACCRUED DURING THE YEAR UPON THE AMOUNTS SO ADVANCED AND REMAINING UNPAID, EXCEPT THAT IF THE FUND IS INSUFFICIENT TO MEET THE PAYMENT OF INTEREST THE SECRETARY OF THE TREASURY MAY, IN HIS DISCRETION, DEFER ANY PART OF SUCH PAYMENT, AND THE AMOUNT SO DEFERRED SHALL BEAR INTEREST AT THE RATE OF 4 PERCENTUM PER ANNUM UNTIL PAID.

SECTION 6 OF THE BOULDER CANYON PROJECT ADJUSTMENT ACT, 54 STAT. 777, PROVIDES AS FOLLOWS:

WHENEVER BY THE TERMS OF THE PROJECT ACT OF THIS ACT PAYMENT OF INTEREST IS PROVIDED FOR, AND WHENEVER INTEREST SHALL ENTER INTO ANY COMPUTATION THEREUNDER, SUCH INTEREST SHALL BE COMPUTED AT THE RATE OF 3 PERCENTUM PER ANNUM COMPOUNDED ANNUALLY.

SUCH PROVISIONS REQUIRE THAT INTEREST AT THE RATE OF 3 PERCENTUM PER ANNUM BE CHARGED ON (1) OUTSTANDING ADVANCES AND (2) ANNUALLY ACCRUED INTEREST THE PAYMENT OF WHICH HAS BEEN DEFERRED. HENCE, THERE IS NO QUESTION BUT THAT, FOR INTEREST COMPUTATION PURPOSES, IT WAS INTENDED TO CAPITALIZE DEFERRED INTEREST EARNINGS IN THE SAME MANNER AS ORIGINAL ADVANCES.

IN OTHER WORDS, VIEWED AS A WHOLE, THE LEGISLATION CONTEMPLATES FINANCING THE COLORADO RIVER DAM FUND THROUGH A SINGLE ACCOUNT IN WHICH THE GOVERNMENT'S INVESTMENT, INCLUDING ACCRUED DEFERRED INTEREST CHARGES, IS CAPITALIZED AND SHOWN AS A SINGLE OUTSTANDING AMOUNT.

IT APPEARS FROM EXHIBIT A, ATTACHED TO AFORESAID LETTER THAT UNDER METHOD USED BY THE TREASURY DEPARTMENT BEGINNING WITH THE FISCAL YEAR 1938--- WHEN THE INITIAL REPAYMENTS WERE MADE--- AMOUNTS REPAID DURING A PROJECT YEAR ( JUNE 1 TO MAY 31) WERE CREDITED AT THE END OF SAID YEAR IN THEIR ENTIRETY TO THE REDUCTION OF THE OUTSTANDING BALANCE IN THE ACCOUNT INCLUDING ACCRUED AND DEFERRED INTEREST. ALSO, THERE WAS ALLOWED AS A CREDIT IN THE ACCOUNT AN AMOUNT REPRESENTING INTEREST AT 3 PERCENT PER ANNUM ON THE REPAYMENTS FROM THE DATES ON WHICH THEY WERE RECEIVED UNTIL THE END OF THE PROJECT YEAR. THUS, AT THE CLOSE OF THE PROJECT YEAR ENDING MAY 31, 1937, THERE WAS AN OUTSTANDING BALANCE OF ADVANCES AND ACCRUED INTEREST TOTALING $87,834,205.50. DURING THE INSURING PROJECT YEAR ADDITIONAL ADVANCES TOTALING $5,685,000 WERE MADE TO THE FUND. INTEREST ACCRUING ON THE SAID ADDITIONAL ADVANCES FROM THE DATES ON WHICH MADE TOTALED $88,848.90, AND THE INTEREST WHICH ACCRUED DURING THE YEAR ON THE OUTSTANDING BALANCE OF $87,834,205.50 WAS $2,635,026.17. THEREFORE, THE NEW OUTSTANDING BALANCE AT THE END OF THE SAID PROJECT YEAR WAS $96,243,080,57. HOWEVER, DURING THE COURSE OF THE PROJECT YEAR REPAYMENTS TOTALING $1,100,000 WERE MADE TO THE TREASURY AND THE ENTIRE AMOUNT THEREOF, TOGETHER WITH THE SUM OF $30,221.91, AS INTEREST, ON THE REPAYMENTS FROM THE DATES ON WHICH MADE TO THE END OF THE PROJECT YEAR, WERE ALLOWED AS CREDITS, RESULTING IN A NET OUTSTANDING BALANCE OF $95,112,858.66 AS OF MAY 31, 1938.

AS APPEARS FROM THE ABOVE-QUOTED PORTION OF THE LETTER OF APRIL 14, A QUESTION HAS ARISEN IN THE TREASURY DEPARTMENT AS TO WHETHER THE REPAYMENTS SHOULD HAVE BEEN APPLIED FIRST TO LIQUIDATE THE INTEREST WHICH HAS ACCRUED ON THE OUTSTANDING ABALANCE FROM THE BEGINNING OF THE OPERATING YEAR TO THE DATES OF THE REPAYMENTS, AND THE BALANCE OF THE REPAYMENTS, IF ANY, APPLIED IN REDUCTION OF THE AMOUNT OF THE OUTSTANDING BALANCE. THIS LATTER METHOD IS IDENTIFIED AS THE " UNITED STATES RULE," AND, THEREUNDER, PARTIAL PAYMENTS ON INTEREST BEARING ACCOUNTS ARE FIRST APPLIED TO DISCHARGE INTEREST DUE. IF A PAYMENT EXCEEDS INTEREST DUE, THE EXCESS OF PAYMENT GOES TO DISCHARGE PRINCIPAL AND INTEREST IS COMPUTED THEREAFTER ON THE BALANCE OF PRINCIPAL. ON THE OTHER HAND, IF THE PAYMENT IS LESS THAN THE INTEREST DUE, THE EXCESS OF INTEREST IS NOT ADDED TO PRINCIPAL BUT INTEREST IS COMPUTED THEREAFTER ON THE FORMER PRINCIPAL UNTIL THE PAYMENTS TAKEN TOGETHER EXCEED THE INTEREST DUE. WHERE INTEREST IS PAYABLE IN PERIODIC INSTALLMENTS WHICH THEMSELVES BEAR INTEREST FROM MATURITY, PARTIAL PAYMENTS ARE FIRST APPLIED TO DISCHARGE INTEREST ACCRUED ON INTEREST, THEN TO DISCHARGE INTEREST ON PRINCIPAL, AND LASTLY TO DISCHARGE PRINCIPAL ITSELF. SEE 47 C.J.S. 66.

HOWEVER, THE SAID RULE DOES NOT APPEAR PROPER FOR APPLICATION WHERE, AS HERE, THE ACCRUED INTEREST, UPON DEFERRAL, LOSES ITS IDENTITY AS INTEREST. THUS, IN THE PRESENT MATTER, SINCE INTEREST UPON BECOMING DUE EITHER IS PAID OR, IF DEFERRED, IS CAPITALIZED, THERE IS NO OCCASION TO CREDIT PARTIAL PAYMENTS TO INTEREST OR PRINCIPAL SEPARATELY. MOREOVER, APPLICATION OF THE RULE AND ADJUSTING THE ACCOUNT AS EACH REPAYMENT IS MADE WITHIN A PROJECT YEAR WOULD NOT APPEAR TO BE IN ACCORDANCE WITH THE PROVISION OF SECTIONS 2 (B) AND (D) OF THE ACT INVOLVED, QUOTED ABOVE, WHICH CONTEMPLATES A DETERMINATION OF ACCRUED INTEREST AT THE END OF THE YEAR.

ACCORDINGLY, THE METHOD OF COMPUTING INTEREST AND APPLYING PARTIAL PAYMENTS WHICH HAS BEEN USED BY THE TREASURY DEPARTMENT APPEARS TO BE PROPER AND TO BE IN ACCORDANCE WITH STATUTORY DIRECTION AND THE ADOPTION OF A DIFFERENT METHOD IS NOT DEEMED TO BE NECESSARY.

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