IRS field advice - When bonus payments are deductible as determined under the - all events test 

November 27:  The IRS, at some point after the November 4 release of the field advice memo (described below) removed text of this memo from the IRS website. The hyperlink (provided below) is no longer operative.

November 4:  The IRS publicly posted a field advice memorandum* (prepared in coordination with Branch 1 of Income Tax & Accounting and signed by IRS Large Business & International Counsel) concerning when may a taxpayer deduct employee bonuses—in the year accrued or in the subsequent year when the bonuses are paid to employees?


The field advice memo concludes that the taxpayer is not entitled to deduct the bonuses until the year when the bonuses are paid pursuant to the “all events test” criteria. 20134301F (release date October 25, 2013, and dated September 18, 2013)

 

Background

The facts considered in the field advice memo are as follows:


  • The taxpayer has a 52/53 week fiscal and tax year.
  • The taxpayer has more than a dozen bonus plans under which employees may be awarded cash bonuses. One of the bonus plans covers a large number of sales floor employees. The other plans cover a fewer number of employees (grouped according to position and/or business unit).
  • Under certain plans, employee bonuses are calculated using formulas that are largely derived by whether certain objectives are satisfied.
  • Under other plans, performance targets are set by a committee of the Board of Directors during the first quarter of the fiscal year, but are not paid until after the committee approves the bonus plan settlement and payment after the end of the fiscal year.
  • Yet another plan takes into account the employee’s individual performance appraisal for the year.

All bonus payments at issue relate to bonuses that are paid after the end of the tax year, but no later than the 15th day of the third month following the end of the tax year. The bonus plans require that an employee be employed at the end of the fiscal year, but do not require that the employee be employed at the time the bonus is paid.

Field advice memo

The field advice memo concludes that with respect to the bonuses, two prongs of the “all events test”—the fact of liability prong and the amount of liability prong—are not met for three types of bonuses:


  • Because the taxpayer retains the right to modify or eliminate the bonuses, the bonuses paid under the cash plans do not meet the all events test any earlier than the date the bonuses are paid.
  • Because bonuses under certain plans are subject to committee approval, the bonuses paid under these plans do not meet the all events test any earlier than the date the bonuses are approved by the committee.
  • Because subjective determinations must be made to calculate the amounts of employee bonuses, the bonuses paid under certain plans do not meet the all events test any earlier than the date the employee performance appraisals are completed.

*Field legal advice memos are documents prepared by IRS field attorneys in the Office of Chief Counsel that are reviewed by an Associate Office, and subsequently issued to field or service center campus employees of the IRS. They are not to be used or cited as precedent.




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