- 11 -
regulations to apply. Thus, we must decide whether includability
of income is sufficiently equivalent to the receipt of income to
satisfy the 2-1/2 month rule. An inextricable element in
arriving at this decision is whether petitioner "paid" the
benefits within the 2-1/2 month period since the statutory
provision, i.e., section 404(a)(5), speaks in terms of payment in
respect of vacation pay and, as will subsequently appear, see
infra pp. 15-17, the legislative history reveals that Congress
considered that payment provided the foundation for the
application of the 2-1/2 month rule. Indeed, this emphasis on
payment, i.e., "paid", may account for respondent's "in the
pocket" interpretation of the word "received" in the temporary
regulations, for it is clear that, if the employees could put the
vacation pay in their pockets, it must have been paid to them.
Section 404(a)(5) (first sentence) allows a deduction in
respect of deferred compensation plans generally when an item is
"includible in the gross income of employees" (emphasis added),
as does section 1.404(a)-12(b), Income Tax Regs. Similarly,
section 83(h) allows a deduction when an item is included in the
employee's income. Furthermore, section 1.461(h)-4T, Temporary
Income Tax Regs., 51 Fed. Reg. 4329 (Feb. 4, 1986), indicates
that includability is the test of receipt for section 404.10 In
10 Sec. 1.461(h)-4T, Q&A-1, Temporary Income Tax Regs., 51 Fed.
Reg. 4312, 4329, provides:
Q-1: What is the relationship between the economic
(continued...)
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