Rev. Rul. 76-345

Rev. Rul. 76-345

The Internal Revenue Service has been requested to state whether it will follow in other cases the decision of the United States Court of Claims in the case of Washington Post Company v. United States, 405 F. 2d 1279 (1969).

The issue in the Washington Post case was whether an accrual method taxpayer may deduct the full amount it accrued under a profit-sharing plan (plan) that had been established for the benefit of its circulation dealers (who were stipulated to be independent contractors and not employees of the newspaper publisher) where part of such amounts is not irrevocably vested in the individual dealers. Under the facts in this case, the taxpayer, in order to provide incentives to its circulation dealers, both to increase sales volume and to maintain a beneficial continuing relationship with the dealers, established a profit-sharing plan. Each year the board of directors allocated to the plan a certain sum that was accrued as a liability on the taxpayer's books and credited to the individual account of each of the dealers. With certain exceptions, if an individual ceased to be a dealer prior to reaching the age of 55 he would receive ten percent of the amount credited to his account in the plan for each year of service up to a maximum of 70 percent. The balance of his account in the plan would be forfeited and reallocated to the remaining dealers in the plan. In the event that the plan was discontinued the amounts accumulated under the plan would irrevocably vest with the dealers who were members of the plan at the time of termination.

The court held that where the taxpayer irrevocably committed itself to payment of whatever amount accrued to the plan and the amount was definitely fixed as of time of accrual, the taxpayer could deduct the full amount accrued even though the ultimate recipients and time of actual payout were undetermined in part.

In arriving at its decision the court stated that when a "group liability" is involved, it is the certainty of the liability that is the utmost importance in the "all events" test, and not necessarily either the certainty of the time over which payment will be made or the identity of the payees.

The "all events" test set forth in section 1.461-1(a)(2) of the Income Tax Regulations provides that an expense is deductible by an accrual method taxpayer for the taxable year in which all the events have occurred which determine the fact of the liability, and the amount thereof can be determined with reasonable accuracy. See also United States v. Anderson, 269 U.S. 422 (1926), V-I C.B. 179 (1926). If there is any doubt that the liability will occur, it may not be deducted until the liability becomes absolute. See Brown v. Helvering, 291 U.S. 193, 201 (1934), XIII-1 C.B. 223 (1934).

Where a taxpayer's liability under a plan is fixed and certain only with respect to a group as a whole, the "all events test" set forth in section 1.461-1(a)(2) of the regulations is not satisfied. Since the group is subject to constant change, neither the ultimate recipients nor the time of distribution can be ascertained in the year of accrual. The "all events test" can be met only when the fact of the liability to a specified individual participant has been clearly established and the amount of liability to each individual can be determined with reasonable accuracy. See also Keco Industries, Inc., 26 P-H Tax Ct. Mem. 51 (1957), appeal dismissed on stipulation (CA-6), which holds that in deferred compensation plans for employees the nonforfeitability requirement of the Code refers to the rights of specific beneficiaries and not the rights of employees as a class.

In view of the foregoing, the Service will not follow the decision in the Washington Post Company case as a precedent in the disposition of similar cases.