Rev. Rul. 71-419

Advice has been requested as to when, under the circumstances described below, a director of a corporation using the cash receipts and disbursements method of accounting is required to include in gross income deferred director's fees.

The corporation's board of directors adopted an unfunded deferred compensation plan under the terms of which a director may elect on or before December 31st of any year to defer receipt of all or a specified part of his annual fees for succeeding calendar years. Any person elected to fill a vacancy on the board and who was not a director on the preceding December 31st, may elect, before his term begins, to defer all or a specified part of his annual fees for the balance of the calendar year following such election and for succeeding calendar years.

The corporation maintains a separate memorandum account of the fees deferred by each director and the corporation also credits the account with interest at a rate specified in the plan. Amounts deferred under the plan together with accumulated interest will be distributed in annual installments over a ten-year period beginning with the first day of the calendar year immediately following the year in which the director ceases to be a director.

An election to defer fees continues from year to year unless the director terminates it by written request but in the event of a termination the amount already deferred by the director cannot be paid to him until he ceases to be a director. In the event the director ceases to be a director of the corporation and becomes a proprietor, officer, partner, employee, or otherwise becomes affiliated with any business that is in competition with the corporation, the entire balance of his deferred fees, including interest, may, if directed by the board of directors, in its sole discretion, be paid immediately to him in a lump sum.

Upon the death of a director or former director prior to the expiration of the period during which the deferred amounts are payable, the balance of the deferred fees and interest in his account shall be payable to his estate in full on the first day of the calendar year following the year in which he dies.

Section 451(a) of the Internal Revenue Code of 1954 provides that the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

Section 1.451-2 of the Income Tax Regulations provides, in pertinent 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 draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.

Under the provisions of the plan cited above, a director who, prior to the time he has earned his fees, elects to defer the payment of them, will receive the fees only at a time subsequent to the termination of his directorship. Since the plan is unfunded, the corporation is under a merely contractual obligation to make the payments when due. A mere promise to pay, not represented by notes or secured in any way, is not regarded as a receipt of income within the cash receipts and disbursements method of accounting. See Revenue Ruling 60-31, C.B. 1960-1, 174.

Accordingly, it is held in the instant case that a director reporting his income for Federal income tax purposes on the cash receipts and disbursements method of accounting will not be required to include the deferred amounts in gross income until the taxable year or years actually paid to him by the corporation unless otherwise made available to him at an earlier date.