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Vacation Pay Deduction
On its 1996 return, Color Arts claimed a deduction of
$1,368,653.06 in salaries and wages. Included in this figure was
accrued vacation pay of $245,000. Respondent disallowed the
claimed deduction for vacation pay (disallowed vacation pay).
Under Color Arts’s vacation pay policy, employees were
eligible to earn vacation pay conditionally during the year.
However, except in the case of death, disability, or retirement,
an employee was not entitled to receive vacation pay “earned”
during the year unless the employee was still employed by Color
Arts on the first working day of the following year. The first
working day of 1996 was January 2, 1996, and the first working
day of 1997 was January 2, 1997. Petitioner concedes that the
$245,000 accrued vacation pay was improperly deducted because
that expense was not properly accrued as of the end of 1996.
The parties also agree that the $245,000 disallowed vacation pay
deduction is properly claimed on Color Arts’s 1997 return.
Color Arts had the same vacation pay policy in force and
accounted for accrued vacation pay in the same way in 1994 and
1995 that it had in 1996. On its 1995 return, Color Arts claimed
a deduction for accrued vacation pay in the amount of
$271,671.04, which was attributable to employment during 1995.
The $271,671.04 vacation pay deduction claimed on Color Arts’s
1995 return did not accrue until the first working day of 1996.
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Last modified: May 25, 2011