Rev. Rul. 71-38

Advice has been requested whether, under the circumstances described below, an employer incurred a liability in 1969 to make a contribution to a profit-sharing plan that meets the requirements of section 401(a) of the Internal Revenue Code of 1954.

A corporation that uses the accrual method of accounting and reports its taxable income on a calendar year basis maintains a qualified profit-sharing plan. The plan provides that the corporation will make annual contributions in such amounts as the board of directors may determine. In December 1969 the board of directors of the corporation passed a resolution providing for a specified contribution to the trust payable out of that year's net profits. The resolution was duly executed, and the employees of the corporation were given oral notice during December that the resolution had been adopted. The corporation paid this amount to the trustee in January 1970.

Section 404(a)(3) of the Code provides that contributions paid under a qualified profit-sharing plan are deductible, within limitations, in the taxable year when paid.

Section 404(a)(6) of the Code provides that a taxpayer using the accrual method of accounting shall be deemed to have made payment on the last day of the taxable year of accrual if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for that taxable year. Section 404(a)(6) of the Code is not applicable unless, during the taxable year on account of which the contribution is made, the taxpayer incurs a liability under the plan to make the contribution, the amount of which is accruable under section 461 of the Code for such taxable year. See section 1.404(a)-1(c) of the Income Tax Regulations.

Revenue Ruling 56-366, C.B. 1956-2, 976, sets forth certain requisites to which an amendment that increases the contribution to be made under a plan containing a definite contribution formula must conform if the amended plan is to meet the requirements of section 39.165-1(a)(1) of Regulations 118 (corresponding to section 1.401-1 of the regulations under the 1954 Code). These requisites are:

1. It must be in writing. In this respect, it must be signed by persons competent to bind the parties before the close of the taxable year under consideration.

2. It must be definite so as to constitute part of the definite written program and arrangement which is the plan.

3. It must be communicated to the employees. This must be done before the contribution is made and before the close of the taxable year under consideration.

4. It must be part of the plan which has been established and is maintained by the employer.

Revenue Ruling 55-446, C.B. 1955-2, 531, permits an accrual basis taxpayer to deduct the total amount of bonuses accrued under a nonqualified written incentive compensation arrangement and paid in the year following the taxable year of accrual where the employer has obligated itself, prior to the close of the taxable year of accrual, to make payment thereof by delivering to each employee concerned either a written or an oral notice of the percentage of such total bonuses to be awarded to him.

The liability for a contribution is established by the terms of the plan itself to the extent that the contribution is called for by a definite plan formula for determining the profits to be shared. Where the employer desires to make a contribution in excess of that called for by the plan formula, or where the plan does not contain a definite contribution formula, something in addition to the plan is necessary to show that the employer has incurred a liability to make the contribution. The problem is the same whether the contribution is in excess of the plan formula, as in Revenue Ruling 56-366, or whether there is no definite plan formula, as in this case. Therefore, the requisites set forth in Revenue Ruling 56-366 for determining whether the employer has incurred a liability to make a contribution before the end of the taxable year involved are applicable to this case. Furthermore, in determining whether the requisite for communication to the employees as set forth in that Revenue Ruling has been met, either oral or written communication to the employees concerned is satisfactory.

Accordingly, it is held that the employer in this case incurred a liability in 1969 for the contribution paid to the trust in January 1970.