Opinion ID: 157660
Heading Depth: 2
Heading Rank: 2

Heading: Vacation Pay

Text: 61 Under American's General Plan, employees receive paid vacation in amounts corresponding to their years of service. The amount of vacation available to an employee during a particular calendar year is based on the number of years the employee will have worked as of the hiring anniversary contained in that year. During the calendar year in which employees reach the second anniversary of their hiring date, they may take two weeks of paid vacation; in the calendar year of the fifth anniversary, three weeks are allowed; and so on. 62 Those who have been continuously employed by the company during the prior calendar year may take the full amount of vacation for the current year at any time during the calendar year. They need not wait until the date of the hiring anniversary upon which the amount is based. However, employees who take vacation and then terminate employment prior to their hiring anniversary must repay that portion of the vacation pay corresponding to the time remaining until the hiring anniversary. For example, an employee hired in December 1986 could take two weeks of vacation in January 1988, but if that employee then quit in March 1988 the employee would have to repay approximately 3/4 of the vacation pay. 63 For the taxable years ending January 31, 1987, and January 30, 1988, American deducted the entire amount of vacation pay which its employees were allowed to take as of January 1 of each year, including that portion still subject to repayment requirements. The Commissioner disallowed deductions for that portion of benefits which employees would have to repay if they did not continue employment beyond the end of the taxable year. The Tax Court upheld the disallowance, holding that the benefits had not yet been earned by employees. 64 In defense of its deductions American cites former I.R.C. § 463, 9 which states in relevant part: 65 (a) Allowance of Deduction.--At the election of a taxpayer whose taxable income is computed under an accrual method of accounting, if the conditions of section 162(a) are otherwise satisfied, the deduction allowable under section 162(a) with respect to vacation pay shall [include] 66 (1) a reasonable addition to an account representing the taxpayer's liability for vacation pay earned by employees before the close of the taxable year.... 67 Such liability for vacation pay earned before the close of the taxable year shall include amounts which, because of contingencies, would not (but for this section) be deductible under section 162(a) as an accrued expense.... 68 American argues that vacation pay is earned as soon as employees are entitled to take it, and that the possibility of repayment is simply a contingency which would otherwise bar accrual but which does not affect deduction under § 463. 10 69 We find this definition of earned unpersuasive. Earnings are not required to be repaid. The benefits at issue were at best advances or loans of vacation pay which employees were expected to earn during continued employment. Although it is clear from the statutory language that for purposes of deductibility Congress intended to disregard contingencies which would prevent earned benefits from being accrued, the possibility of repayment is not such a contingency. Rather, American's repayment requirement prevents the vacation pay at issue from being earned in the first place. 70 American notes that one of the contingencies which Congress expressly took into account in drafting § 463 was termination of employment before vacation time arrives. S.Rep. No. 93-1357 (1974), reprinted in 1974 U.S.C.C.A.N. 7478, 7479. It contends that this shows that Congress intended to allow the deductions at issue here, where employees must repay advance vacation benefits if they terminate employment. 71 Contrary to American's claims, its position is not compelled by the legislative history it cites, and would undermine the requirement that vacation pay be earned in the year of deduction. While we agree with American that § 463 permits a deduction for a category of vacation pay which may be characterized as earned but contingent on continued employment, the pay at issue is not such an amount. Rather, such amounts would include vacation pay attributable to work done during the taxable year, but which employees were not eligible to take until after the end of the taxable year, and which they would lose if they were terminated prior to attaining such eligibility. 72 Thus we conclude that Congress intended to allow a deduction for vacation benefits corresponding to work done during the taxable year, whether or not employees were eligible to take the vacation during the taxable year, and even though termination of employment before such eligibility might mean the employer would never actually pay those benefits. American's position is directly contrary, asserting deductions for vacation pay which employees were eligible to take during the taxable year but which corresponded to work done after the taxable year. We therefore find no support in § 463 for American's deductions. 73 Accordingly, the judgment of the United States Tax Court is AFFIRMED.