Forgot your password?
Please enter your email & we will send your password to you:
My Account:
Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1996 LC CASE SUMMARIES 107 T.C. No. 16 (1996)
Topics:
I.R.C. sec. 83.
Type of Lawsuit:
Taxpayer sued the Commissioner of the IRS after the IRS disallowed a deduction.
Principals:
Plaintiff/Taxpayer: Schmidt Baking Co., Inc.;
Defendant: Commissioner of Internal Revenue.
Underlying Transaction:
Funding of severance pay and vacation obligations.
LC:
Standby for U.S. $2,092,421. Silent as to whether subject to UCP.
Procedural History:
The United States Tax Court, Tannennwald, J., entered judgment in favor of the taxpayer.
Rule:
A taxpayer could deduct payments for vacation and severance pay when those obligations accrued during the tax year and were funded through the issuance of a letter of credit.
Article
Factual Summary: To finance its vacation and severance pay obligations to its employees for the prior year, the applicant caused a standby to be issued in the employees' favor. If the employer failed to pay the employees for these obligations, each could make a drawing for their share. The applicant then deducted the face amount of the credit on its tax return for that year. The U.S. Internal Revenue Service ("IRS") disallowed the deduction and the taxpayer brought an action against the Commissioner of the IRS.
The applicant/taxpayer argued that for purposes of the IRC, the employees had "received" the payments when the standby was issued making them deductible in the year in which the obligations were incurred. Both parties stipulated that the amounts were includable in the employee's income when the credit was issued, but the Commissioner argued that the employee's did not yet have it in their pockets and, therefore, had not "received" the income. As such, the Commissioner argued that the letter of credit operated as a deferred compensation plan which the taxpayer could not fully deduct in the disputed tax year.
Legal Analysis:
1. I.R.C. sec. 83: The court ruled that, by "purchasing" the letter of credit the taxpayer had irrevocably parted with its funds, which were not subject to the claims of creditors and were includable in the employees' income. As such, the letter of credit was not a deferred compensation plan and the taxpayer was allowed to take the deduction.
Comment:
As seen, taxing authorities want to have it both ways: tax the employee when the standby is issued but only allow the employer the deduction when the drawing occurs. In this regularly changing world, it's good to know that some things remain constant.
©1997 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.