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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