Applicable Federal Rate Law and Legal Definition

In a contract of loan or installment sale, if the interest rate is not stated and the tax payer is receiving or making payments, the IRS assumes a rate of interest based on the published applicable federal rate. For instance, if you sold some land on an installment sale and agreed to receive the payments over a 10-year period interest free, the IRS would determine that part of your sales price was actually interest and calculate the interest amount based on the applicable federal rate.