- 41 -
The Senate report for Pub. L. 93-625 states that the repeal of
I.T. 3956 "creates hardships for taxpayers who have been accruing
vacation pay under plans which do not meet the requirements of
the strict accrual rules set forth in * * * [Rev. Rul. 54-608]."
S. Rept. 93-1357 (1974), 1975-1 C.B. 517, 521-522. The Senate
report further states that section 463 "has been developed as a
result of * * * [Congress' study of this problem] and insofar as
accrued vacation pay is concerned the committee believes it
represents the permanent legislation promised by the committees."
Id. at 9, 1975-1 C.B. at 522.
Section 463 permitted taxpayers to elect to establish a
reserve account for the accrual of vacation benefits. It
authorized a yearend deduction for "earned" but unpaid vacation
benefits which otherwise failed to satisfy the strict accrual
test due to the existence of contingencies which could result in
the forfeiture of leave entitlement. Sec. 463(a)(1). To qualify
for deduction, the benefits also had to be payable to employees
within 12 months after the end of the tax year (a period later
reduced to 8-1/2 months for tax years beginning after December
31, 1986). Sec. 463(a)(1).
Petitioner accrued and deducted all vacation benefits that
it expected to pay within 12 months of the close of TYE 8701 and
within 8-1/2 months of the close of TYE 8801. The parties agree
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