IRS Guidance on "All Events Test" for Bonuses May Have Broader Implications for Accrual Taxpayers
Recently, the IRS issued Rev. Rul. 2011-29 addressing this first prong of the all events test in the context of employee bonus programs. In the ruling, an accrual method employer has a program to provide bonuses to employees for services performed during the taxable year. The program has defined terms and conditions that the employer communicates to employees. The employer determines the general bonus pool for the group of eligible employees prior to year end (either by a fixed formula or corporate action). However, the individual bonuses are not determined or paid until after the end of the taxable year (but before March 15 to avoid Code section 409A deferred compensation issues). At the end of the taxable year, the employer does not know the identity of any particular recipient or the amount payable to any recipient. Nevertheless, the employer knows the exact total amount to be paid, as the program requires that any amount owed to any employee who is no longer employed on the payment date must be reallocated to other eligible employees rather than reverting back to the employer.
In summary, Rev. Rul. 2011-29 held that the employer with such a program satisfies the "fact of the liability" prong of the all events test and can therefore take a deduction for the bonuses to be paid to the group. After all, the total amount of the employer's liability is fixed and definite at year end and the employer is obligated to pay this total amount, even though the identity of the ultimate recipients is not certain. (Note that this would not be the case if any amount could revert to the employer, as addressed in Chief Counsel Advice 200949040). This conclusion follows the reasoning in a US Court of Claims Case ( Washington Post Co. v. U.S., 405 F.2d 1279 (Ct. Cl. 1969)), which the IRS previously expressly disavowed in Rev. Rul. 76-345.
Note, if a taxpayer relies on this Revenue Ruling to change its treatment of bonuses, it is considered a change in accounting method that must comply with I.R.C § 446.
Of course, this new guidance is important for any employers who have similar fixed liability employee bonus programs. However, it is arguably also important in other contexts where the total amount of a taxpayer's liability is fixed and certain, but the payee(s) are uncertain. For example, it could apply when a contract claim has been assigned multiple times, when there is a class action gross settlement amount, or when a property developer faces claims from contractors and subcontractors for a property. While the Revenue Ruling wouldn't be binding in other contexts, it may be persuasive authority, particularly when combined with a US Supreme Court case allowing a deduction for slot payouts. That is, Rev. Rul. 2011-29 follows analogous reasoning in a US Supreme Court Case regarding payout of slot machine jackpots ( U.S. v. Hughes Properties, Inc., 476 U.S. 593 (1986)).
Fraser Stryker is a leader in employee benefits and tax law. Attorneys in the Firm's Employee Benefits and Taxation Practice Groups can provide guidance to employers regarding the structure of bonus plans and other tax issues based on our experience in those areas. For more information, please contact or Nicole R. Konen.
This article is provided by Fraser Stryker for general informational purposes and is not intended to be and should not be construed as legal advice on any specific facts or circumstances.
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