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in this case is particularly appropriate where neither party
questions the validity of the 2-1/2 month rule, but merely its
application.
Prior to 1987, section 404(a)(5) contained only the first
sentence; the rules governing vacation pay were contained in
section 463, which provided for a deduction based on the
establishment of a reserve. In 1987, when the Omnibus Budget
Reconciliation Act of 1987, Pub. L. 100-203, 101 Stat. 1330, was
being considered, both the House and Senate proposed to repeal
section 463 and make no change in section 404(a)(5) as it then
stood. In so doing, the House Ways and Means Committee and the
Senate Finance Committee discussed the proposed action in the
following identical language:
7. Reserve for accrued vacation pay (sec. 10121 of the
bill and sec. 463 of the Code)
Present Law
Under present law, an accrual-method taxpayer
generally is permitted a deduction in the taxable year
in which all the events have occurred that determine
the fact of a liability and the amount thereof can be
determined with reasonable accuracy (the "all-events"
test). In determining whether an amount has been
incurred with respect to any item during the taxable
year, all events that establish liability for such
amount are not treated as having occurred any earlier
than the time economic performance occurs (sec.
461(h)). With respect to a liability that arises as a
result of another person's providing services to the
taxpayer (such as the liability to provide vacation pay
in exchange for service by an employee), economic
performance generally occurs when such other person
provides the services.
In order to ensure the proper matching of income
and deductions in the case of deferred benefits (such
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