Employer with Discretion to Reduce or Eliminate Bonuses Prior to Payment Not Entitled to Deduction in Year Bonuses Accrued, Rather Than in Year Paid

In Field Attorney Advice Memorandum 20134301F, the IRS determined that an employer was not entitled to deduct bonus compensation in the year it was earned, rather than in the year it was paid, because the corresponding bonus plan documents gave the employer unilateral discretion to reduce or eliminate bonus amounts at any time before they were paid. Under the ?Ç£all events test,?Ç¥ an employer generally may deduct bonus compensation in the year it is earned, rather than in the year it is paid, if (i) all events have occurred by the end of the year to which the bonus relates that establish both the fact and amount of liability and (ii) the bonus is paid within 2???ámonths after the end of such year. The IRS reasoned that the discretion to reduce or eliminate bonus amounts at any time prior to payment prevents the ?Ç£fact of liability?Ç¥ and the ?Ç£amount of liability?Ç¥ from being determined until the bonuses are actually paid. The IRS memorandum noted that if a bonus ?Ç£pool?Ç¥ is establish by the end of the year but the employer retains discretion with regard to the allocation of the pool among eligible employees, such an arrangement would satisfy the all events test even though the plan provides for such discretion.