## Facts

- Albertson’s, Inc. entered nonqualified deferred-compensation agreements with eight executives and one outside director, allowing participants to defer portions of current compensation.
- During the deferral period, Albertson’s retained and used the deferred “basic amounts” as working capital.
- At payout (generally upon retirement or termination), Albertson’s owed participants the basic amounts plus “additional amounts” computed annually to reflect the time value of the deferred compensation (using formulae tied to interest-like or index-based measures).
- Some participants could elect continued deferral (with continued accrual of additional amounts) for up to fifteen additional years.
- Albertson’s sought to deduct the additional amounts as they accrued, contending they were “interest” on indebtedness under I.R.C. § 163(a).
- The IRS determined deficiencies, asserting the additional amounts were part of deferred compensation and deductible only when paid under I.R.C. § 404’s timing rule.
- The Tax Court agreed with the IRS; an initial Ninth Circuit opinion reversed, but on rehearing the Ninth Circuit vacated its prior analysis on the deferred-compensation issue and reconsidered the deduction timing question.

## Issues

1. Whether the “additional amounts” credited under nonqualified deferred-compensation agreements constitute “interest” currently deductible as paid or accrued under I.R.C. § 163(a).
2. Whether, even if interest-like in economic effect, the additional amounts are governed by I.R.C. § 404 so that the employer’s deduction is deferred until payment and employee income inclusion.

## Decision

- On rehearing, the Ninth Circuit affirmed the Tax Court’s judgment on the deferred-compensation agreement issue.
- The court held Albertson’s could not currently deduct the additional amounts as “interest” under § 163(a).
- The court held § 404 controlled the timing of deductions for the additional amounts, allowing a deduction only in the taxable year the amounts are paid to, and included in income by, the participants.
- The court treated the additional amounts as part of an integrated deferred-compensation arrangement rather than interest on a separate indebtedness.

## Legal Principles

- I.R.C. § 404 is a specific timing provision governing employer deductions for payments under deferred-compensation plans and generally requires matching the employer’s deduction with the employee’s income inclusion.
- A more specific statute governing a particular subject (here, § 404 for deferred compensation) can limit the application of a more general deduction provision (here, § 163(a) for interest) as to the timing of deductions.
- Amounts credited to participants to reflect the time value of deferred compensation, even if economically similar to interest, may be treated as compensation within the deferred-compensation plan for deduction-timing purposes.
- Statutory interpretation should avoid readings that would defeat the overall legislative design of the relevant statutory scheme, including Congress’s objective of limiting tax advantages for nonqualified deferred-compensation arrangements.

## Conclusion

The Ninth Circuit held that time-value “additional amounts” credited under Albertson’s nonqualified deferred-compensation agreements were not currently deductible as interest; instead, § 404 required Albertson’s to deduct those amounts only when paid and included in the participants’ income.


Albertson’s, Inc. v. Commissioner, 42 F.3d 537 (9th Cir. 1994)