Bonuses ruled deductible in year paid.

• Author: Beavers, James A.

The IRS Office of Chief Counsel (OCC) advised that a taxpayer could take a liability for bonus payments into account only in the year the bonus payments were made.

Background

The taxpayer is a corporation that uses an accrual method of accounting for federal income tax purposes. Under the taxpayer's nonexecutive incentive compensation plan, employees are required to be employed by the taxpayer on the date that bonuses are paid in order to receive a bonus. Any amounts not paid to employees as bonuses are forfeited and revert to the taxpayer. The IRS granted the taxpayer permission, per Sec. 461, to treat bonuses as incurred in the tax year in which all events have occurred to establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability.

The taxpayer, in an internal memorandum, obligated itself "to pay 90% of the amount accrued for financial statement purposes with respect to [the nonexecutive] incentive compensation plans" related to fiscal year 1 within the first two and a half months of year 2. The taxpayer would pay any amounts it did not pay to employees to a designated charity as a charitable contribution. For tax year 1, the taxpayer did not make a charitable contribution because it paid bonuses in excess of the 90% threshold. The taxpayer paid the year 1 bonuses during the first two and a half months of year 2. The taxpayer did not make the 90% obligation a part of the company's bonus plan and did not communicate it to its employees in year 1 because it did not alter the bonus plan or terms for the employees.

The OCC was asked to advise on what year the taxpayer should take a deduction for the bonus payments. The taxpayer argued that it had a fixed and determinable liability at the end of year 1 for 90% of the amount accrued for financial statement purposes for the nonexecutive incentive compensation plans for year 1 and that, as a result, it was entitled to take that amount into account in year 1 under Secs. 404(a) and 461. It reasoned that the combination of its nonexecutive incentive compensation plans and its obligation to contribute to the charity any amounts not paid...