IRS attacks vacation pay deduction acceleration.
The Tax Adviser › Vol. 26 Nbr. 3, March 1995
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Summary
The IRS position that employer deductions of accrued but not paid vacation pay may not be taken until the tax year when the employee actually receives the pay is based on a poor reading of the legislative history of IRC section 404(a)(5). Accelerating vacation pay deductions had been a widely accepted practice among accrual basis taxpayers. The misinterpretation revolves around the way the legislative history distinguishes between deferred vacation pay and other forms of deferred compensation. The IRS failed to establish whether the deferred compensation rules should even apply.
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IRS attacks vacation pay deduction acceleration.
In Letter Ruling (TAM) 9443006, the IRS National Office ruled against a widely used method of accelerating deductions of vacation pay accrued at the end of a tax year but not received by employees until they take their vacations during the following year. This position will presumably be followed by IRS agents in the field, which will probably lead to many audit challenges to similar arrangements. The argument underlying this ruling is extremely weak, however. It is based on an out-of-context reading of the applicable Code provision's legislative history that is unlikely to pers...
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