SCOTUS Reports

Tag: Accrued Bonuses

  • Kaw Dehydrating Co., Inc. v. Commissioner, 68 T.C. 379 (1977): Requirements for Constructive Receipt in Accrued Bonuses

    Kaw Dehydrating Co. , Inc. v. Commissioner, 68 T. C. 379 (1977)

    Accrued bonuses are not deductible if not constructively received by related taxpayers within 2½ months after the close of the taxable year.

    Summary

    Kaw Dehydrating Co. sought to deduct $61,739. 06 as accrued bonuses for two controlling shareholders in 1973. The IRS disallowed the deduction under Section 267 because the bonuses were not paid or constructively received within 2½ months after the tax year. The Tax Court held that the bonuses were not constructively received because they were merely discussed, not formally approved, and not credited to the shareholders’ accounts until well after the grace period, thus disallowing the deduction.

    Facts

    Kaw Dehydrating Co. , an accrual basis corporation, discussed bonuses for its president and vice president, R. M. Bunten, Jr. and W. W. Bunten, at a board meeting on October 3, 1973. The bonuses were set at percentages of the company’s profit but were not formally approved or credited to the Buntens’ accounts until June 30, 1974. The company deducted these bonuses on its 1973 tax return, but the IRS disallowed the deduction because the bonuses were not paid or constructively received within 2½ months after the close of the 1973 tax year.

    Procedural History

    The IRS issued a statutory notice of deficiency to Kaw Dehydrating Co. for the 1973 tax year, disallowing the deduction of the bonuses. The company petitioned the Tax Court for a redetermination of the deficiency. The Tax Court upheld the IRS’s determination and entered a decision for the respondent.

    Issue(s)

    1. Whether the bonuses claimed by Kaw Dehydrating Co. as deductions in 1973 were constructively received by R. M. Bunten, Jr. and W. W. Bunten within the period consisting of the taxable year and 2½ months after the close thereof.

    Holding

    1. No, because the bonuses were merely discussed and not formally approved or credited to the Buntens’ accounts until well after the 2½ month period, thus failing to meet the constructive receipt requirements under Section 267.

    Court’s Reasoning

    The court applied Section 267, which disallows deductions for unpaid expenses to related taxpayers unless paid or constructively received within 2½ months after the close of the tax year. The court found that the bonuses were not constructively received because they were not credited to the Buntens’ accounts until June 30, 1974, and no formal resolution or action was taken to approve them. The court noted that the minutes of the October 3, 1973, meeting only discussed the bonuses without definitive action, and the subsequent issuance of promissory notes in June 1974, with interest starting from that date, indicated that the bonuses were not available to the Buntens earlier. The court also considered the lack of payment of a similar bonus to another employee as further evidence that the bonuses were not constructively received. The court emphasized that constructive receipt is a factual determination and found the evidence insufficient to support the taxpayer’s position.

    Practical Implications

    This decision underscores the importance of formal action and timely crediting of bonuses to related taxpayers’ accounts to satisfy the constructive receipt requirements under Section 267. For similar cases, attorneys must ensure that bonuses are properly authorized and credited within the statutory period to secure deductions. This ruling affects how closely held corporations handle bonus payments to controlling shareholders, requiring strict adherence to formalities and timely accounting entries. The decision also has implications for tax planning, as it highlights the need for clear documentation and action to support deductions. Subsequent cases have continued to apply the principles established in Kaw Dehydrating, emphasizing the factual nature of constructive receipt determinations.

  • White v. Commissioner, 61 T.C. 763 (1974): Constructive Receipt and Deductions for Subchapter S Corporations

    White v. Commissioner, 61 T. C. 763 (1974)

    A subchapter S corporation may deduct accrued bonuses credited to its sole stockholder within 2 1/2 months after the close of its taxable year, even if the stockholder has not yet received actual payment.

    Summary

    Robert White, sole stockholder and president of a subchapter S corporation, accrued a year-end bonus of $20,800 in 1966 and 1967. The corporation credited the bonus to White’s account, but he did not receive actual payment until the following year. The Tax Court held that White constructively received the bonus within 2 1/2 months after the close of the corporation’s taxable year, allowing the corporation to deduct the bonus. This ruling clarified that constructive receipt satisfies the payment requirements of section 267 for subchapter S corporations, despite arguments that actual payment should be required.

    Facts

    Robert White was the sole stockholder and president of Gardner’s Village, Inc. , a subchapter S corporation using the accrual method of accounting. In 1964, the corporation adopted a policy of paying White a weekly salary and a year-end bonus of $20,800, credited to his account at year-end. For the years 1966 and 1967, the bonuses were accrued but not paid until September 1967 and May 1968, respectively. White reported the bonuses on his income tax return in the year he received payment. The corporation had sufficient cash to cover the bonuses at all relevant times.

    Procedural History

    The Commissioner disallowed the corporation’s deduction for the bonuses, arguing they were not paid within 2 1/2 months after the close of the taxable year as required by section 267. White petitioned the U. S. Tax Court, which heard the case and rendered its decision in 1974.

    Issue(s)

    1. Whether the bonuses accrued by the subchapter S corporation were constructively received by White within 2 1/2 months after the close of the corporation’s taxable year, allowing the corporation to deduct the bonuses under section 267?

    Holding

    1. Yes, because the bonuses were credited to White’s account and he had unrestricted power to withdraw them, satisfying the constructive receipt doctrine within the required timeframe.

    Court’s Reasoning

    The court applied the constructive receipt doctrine, as defined in section 1. 451-2(a) of the Income Tax Regulations, which states that income is constructively received when it is credited to the taxpayer’s account or made available for withdrawal. The court found that the bonuses were credited to White’s account and he had the ability to draw upon them at any time after the close of the corporation’s taxable year. The court rejected the Commissioner’s argument that actual payment should be required for subchapter S corporations, noting that section 267 requires only that the amount be includable in the payee’s income within the specified period. The court distinguished cases involving actual distributions under sections 1373 and 1375(f), which do not apply to the constructive receipt doctrine under section 267.

    Practical Implications

    This decision clarifies that subchapter S corporations may deduct accrued bonuses credited to a stockholder’s account within 2 1/2 months after the close of the taxable year, even if the stockholder has not yet received actual payment. Attorneys advising subchapter S corporations should ensure that accrued bonuses are properly credited to the stockholder’s account and that the stockholder has the ability to withdraw the funds within the required timeframe. This ruling may affect how subchapter S corporations structure compensation arrangements and plan for tax deductions. Later cases have applied this principle, confirming that constructive receipt satisfies the payment requirements of section 267 for subchapter S corporations.