The IRS has determined that an employer using an accrual method of accounting can establish "fact of the liability" under the first-prong of Code Sec. 461's all-events test for bonuses payable to a group of employees, even though the employer would not know the identity of any specific recipient and the exact amount payable to that recipient until after the end of the tax year (Rev. Rul. 2011-29, 2011-49 IRB)
Comment
"Rev. Rul. 2011-29 is welcome guidance from the IRS and resolves some recent uncertainty on the issue. The ruling makes clear that a company that is obligated at the end of its tax year to pay a minimum bonus pool amount in the next year can meet the รข€˜all events test' and deduct the amount for its current tax year," John McGuiness, principal, The Groom Law Group, Chartered, Washington, D.C., said. "This is true even though, as is often the case, the identity of the specific employees who will share in the bonus pool in the next year are not known at the end of the company's current year."
The taxpayer maintained an employee bonus program. Bonuses were calculated either through a formula or through other corporate action. Bonuses would be paid after the end of the tax year in which the employee performed services but before the 15th day of the third calendar month after the close of that tax year.
An employee must be employed by the company on the date the bonuses are paid to receive a bonus. Any bonus amount allocable to an employee who is not employed when the bonuses are paid is reallocated among other eligible employees.
Generally, Code Sec. 461(a) provides that the amount of any deduction or credit must be taken for the tax year that is the proper tax year under the method of accounting the taxpayer uses to compute taxable income. Reg. §1.461-1(a)(2)(i) further provides that, under an accrual method of accounting, a liability is incurred, and is generally taken into account for federal income tax purposes, in the tax year in which:
* All the events have occurred that establish the fact of the liability;
* The amount of the liability can be determined with reasonable accuracy; and
* Economic performance has occurred for the liability.
In Rev. Rul. 55-446, 1955-2 CB 531, the IRS had determined that bonuses payable under an incentive compensation plan, the exact amounts of which cannot be determined and paid by an accrual basis taxpayer until early in the following year, would properly be accruable and deductible for the year to which they relate, provided the total bonuses are definitely determinable through a formula in effect prior to the end of the tax year.
Comment
Rev. Rul. 61-127, 1961-2 CB 36, removed a notice requirement described in Rev. Rul. 55-446.
In Washington Post Co. v. United States, CtCls, 69-1 USTC ¶9192, the United States Court of Claims (the forerunner to today's Court of Federal Claims) found that a taxpayer incurred a liability to pay bonuses under a plan maintained for the benefit of certain employees as a group. Under the plan, if an employee did not meet certain specified conditions, a portion of the employee's share would be forfeited and reallocated to other dealers. The IRS declined to follow Washington Post in Rev. Rul. 76-345, 1976-2 CB 134.
The IRS determined, citing Rev. Rul. 55-446, the fact of the employer's liability for the minimum amount of bonuses would be established by the end of the year in which the services are rendered. The IRS noted that the employer would not know the identity of the ultimate recipients and the amount, if any, each employee would receive prior to the end of the tax year. However, these factors did not alter the outcome. Therefore, all the events have occurred by the end of the tax year that establish the employer's liability to pay the minimum amount of bonuses for purposes of the first-prong of the all-events test under Reg. §1.461-1(a)(2)(i), the IRS concluded.
Comment
The Supreme Court allowed a taxpayer to deduct amounts guaranteed for payment of progressive jackpots that had not yet been won in United States v. Hughes Properties, Inc., S.Ct., 86-1 USTC ¶9440. According to the Supreme Court, identification of the eventual recipients of the jackpots was inconsequential.
The IRS also advised that any change in a taxpayer's treatment of bonuses to conform with Rev. Rul. 2011-29 would be a change in method of accounting (to be made under Code Secs. 446 and 481). Additionally, the IRS revoked Rev. Rul. 76-345.
Reference: PTE §38,430.05
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