Albertson’s, Inc. v. Commissioner
United States Court of Appeals for the Ninth Circuit
42 F.3d 537 (1994)
Albertson’s, Inc. (plaintiff) entered into nonqualified deferred-compensation agreements with eight executives and one outside director. The agreements stated that Albertson’s would delay paying the agreeing employee the employee’s annual basic compensation, plus additional amounts that were calculated annually, until the employee retired or otherwise left Albertson’s. The participating employees could also delay their payments for an additional 15 years, during which time Alberton’s would continue to add the annual additional amounts. In 1982 Albertson’s requested permission from the Internal Revenue Service (the IRS) (defendant) to deduct the additional amounts during the year they accrued. The IRS granted permission in 1983. In 1987 the IRS reversed its policy, disallowing deductions on the additional amounts until the employees received them and determining tax deficiencies against Albertson’s for the amount Albertson’s deducted. Albertson’s petitioned the United States Tax Court for a redetermination, arguing that the additional amounts were interest payments that could be deducted when they accrued. The tax court held that the additional amounts were not interest, but compensation that could not be deducted until the employees received the additional amounts. The United States Court of Appeals for the Ninth Circuit reversed the tax court, holding that, under the plain language of § 163(a) of the Internal Revenue Code (the IRC), the additional amounts were interest payments. The court further held that interest payments were not governed by § 404 of the IRC, which regulated deductions for contributions under a deferred-payment plan. However, the court acknowledged that its interpretation of § 404 undercut Congress’s purpose in enacting the provision, which was to discourage nonqualified deferred-compensation plans and encourage qualified deferred-compensation plans by requiring employers to match inclusions and deductions of income and expense between qualified and nonqualified deferred-compensation plans. Ultimately, the court held that Albertson’s could deduct the additional amounts when they accrued. The IRS petitioned the Ninth Circuit for a rehearing.
Rule of Law
Holding and Reasoning (Reinhardt, J.)
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