Rev. Rul. 69-649

Advice has been requested as to when, under the circumstances described below, an employee receiving awards in accordance with the provisions of a non-qualified unfunded deferred compensation plan is subject to tax on the amounts awarded.

Prior to 1967 the employer-corporation awarded an annual incentive bonus to key employees and paid these awards in cash shortly after the amount of the award was determined.

During 1967 the board of directors of the corporation approved a supplementary retirement plan (a non-qualified unfunded deferred compensation plan) under which any part or all of any employee's incentive bonus award for 1967 and subsequent years will be paid at a designated future time, rather than currently in cash as under the corporation's prior practice.

The selection of employees to participate in the plan and the amount of bonus awarded participating employees is determined by a committee of the board of directors of the corporation who are neither officers nor employees of the corporation or of any of its affiliates. This committee also has the sole discretion to defer all or any part of any employee's incentive bonus award.

No employee has any right to receive any incentive bonus for any year (whether to be paid in cash or to be deferred) until such time, if any, as the above described committee makes an award to him. No employee has any election as to the amount or time of payment of his award for any year. Further, the last of any such payment(s) must be paid no later than 10 years from the normal retirement date of the employee.

The obligations of the corporation under this supplementary retirement plan are merely contractual and are not funded or secured. The awards are nonassignable. However, in the case of death the awards are payable to the employee's designated beneficiary.

The employee-taxpayer in the instant case was awarded an incentive bonus under the plan that is to be paid to him in a designated future year.

Section 1.451-2 of the Income Tax Regulations provides, in part, that income is constructively received in the taxable year during which it is credited to the taxpayer's account, set apart for him, or otherwise made available so that he may obtain it at any time. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.

In the instant case, it is held that the incentive bonus award to the employee, which is deferred under this supplementary retirement plan, is not includible in income in the year earned. The amount thus deferred is includible in the gross income of the recipient in the later taxable year(s) in which it is actually received by or otherwise made available to him, whichever is earlier.

The employer-corporation is entitled to deduct this deferred bonus award under section 404(a)(5) of the Internal Revenue Code of 1954 only in the taxable year in which payments are actually made to the employee or his legal representative, to the extent such payments are ordinary and necessary expenses within the meaning of section 162 of the Code.