Schmidt Baking Company, Inc. - Page 1

                                      107 T.C. No. 16                                        

                                 UNITED STATES TAX COURT                                     

                      SCHMIDT BAKING COMPANY, INC., Petitioner v.                            
                      COMMISSIONER OF INTERNAL REVENUE, Respondent                           

                Docket No. 10458-95.               Filed November 14, 1996.                  

                     P funded its vacation and severance pay                                 
                obligations to its employees for 1991 by purchasing an                       
                irrevocable letter of credit on March 13, 1992.  The                         
                letter of credit constituted a transfer of an interest                       
                in substantially vested property, includable in income                       
                of the employees as of that date under sec. 83, I.R.C.                       
                P, an accrual basis taxpayer, deducted the amount of                         
                the letter of credit on its 1991 return on the basis                         
                that it paid the vacation pay within 2-1/2 months of                         
                the close of its 1991 taxable year and was therefore                         
                entitled to the claimed deduction under sec. 83(h),                          
                I.R.C., and sec. 1.83-6(a)(3), Income Tax Regs.  R                           
                disallowed the deduction on the ground that the letter                       
                of credit did not constitute payment to the employees                        
                within the 2-1/2 month period with the result that sec.                      
                404(a)(5), I.R.C., and sec. 1.404(b)-1T, Temp. Income                        
                Tax Regs., 51 Fed. Reg. 4321 (Feb. 4, 1986), applied                         
                and the deduction was not allowable to P for its 1991                        
                taxable year.  Held, the letter of credit constituted                        
                payment on March 13, 1992, so that sec. 404(a)(5),                           

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