In Rev. Rul. 2011-29, 2011-49 IRB 1, the IRS has ruled that an employer can establish the "fact of the liability" under §461 for bonuses payable to a group of employees even if the employer does not know the identity of any particular bonus recipient and the amount payable to that recipient until after the end of the taxable year.
Under section 461(a), the amount of any deduction or credit must be taken for the tax year that is the proper tax year under the method of accounting the taxpayer uses to compute taxable income. Hence a liability is incurred under the accrual method of accounting when:
(1) all the events have occurred that establish the fact of the liability,
(2) the amount of the liability can be determined with reasonable accuracy, and
(3) economic performance has occurred for the liability.
This is sometimes referred to as the “all events test.” The ruling dealt with the first prong of the all events test.
Generally, all events occur to establish the fact of a liability when (1) the event fixing the liability (performance or some other event) occurs, or (2) payment is unconditionally due.
In the ruling the employer uses an accrual method of accounting for federal income tax purposes and pays bonuses to a group of employees for services performed during the tax year. The minimum total amount of bonuses payable to the employees as a group is determinable either through a formula that is fixed before the end of the tax year or through other corporate action, such as a resolution of the board of directors. Bonuses are paid after the end of the tax year in which the employee performed the related services but before the 15th day of the third calendar month after the close of that tax year.
Relying principally on Washington Post Co. v. United States, 405 F.2d 1279 (Ct. Cl. 1969) and United States v. Hughes Properties, Inc., 476 U.S. 593 (1986) The IRS found that the employer's liability to pay a minimum amount of bonuses to the group of eligible employees was fixed at the end of the year in which the services are rendered. It is irrelevant, the IRS noted, that the identity of the ultimate recipients and the amount, if any, each employee will receive cannot be determined before the end of the tax year. Accordingly, for purposes of the first prong of the test under reg. section 1.461-1(a)(2)(i), all the events have occurred by the end of the tax year that establish the fact of the employer's liability to pay the minimum amount of bonuses.
The IRS also indicated that any change in an employer's treatment of bonuses for the purpose of conforming to Rev. Rul. 2011-29 is a change in method of accounting that must be made in accordance with sections 446 and 481, as well as the applicable regulations and administrative procedures.