Liability For Bonus Compensation Becomes Fixed When The Contingency Is Satisfied

In a recent legal memorandum (ILM 201246029), the IRS concluded that a liability for bonus compensation is taken into account in the year in which the bonuses are paid, because the taxpayer's employees were required to still be employed on the date of payment in order to receive the bonus and ultimately some forfeited bonuses might revert to the taxpayer.

Under the taxpayer's incentive compensation plan (ICP), the aggregate amount of bonuses for book purposes was finalized at the end of the plan year based on the number of eligible employees employed on Dec. 31. Bonuses were determined during the annual compensation planning process in January or February. The aggregate amount of bonuses paid generally did not exceed the amount accrued for book purposes at the end of the year. The ICP required eligible employees to remain employed with the taxpayer when the bonuses were paid in order to receive a bonus.