## Facts

- The Internal Revenue Service addressed when cash-method taxpayers must include deferred compensation in gross income under several nonqualified deferred compensation fact patterns.
- In one scenario, an executive’s employment contract provided a stated salary plus additional annual compensation credited to a bookkeeping “reserve account,” payable in installments only upon specified future events (e.g., termination, part-time status, or incapacity).
- The employer’s obligation to pay the reserve amounts was described as purely contractual; the reserve was not intended to be held in trust, and no segregated fund was established for the employee.
- The executive had no current right to demand payment; in the event of death, remaining amounts were payable to the estate in installments.
- In another scenario, a corporation’s “future payments” plan credited portions of profits to participant accounts on corporate books, with no current payout.
- Additional scenarios considered arrangements using trust- or escrow-type devices to set aside amounts for later payment, varying employee control, vesting, and exposure to employer creditors.

## Issues

1. For a cash-method employee, whether deferred compensation credited on an employer’s books is includible in income under the constructive receipt doctrine in the year earned.
2. Whether placing deferred amounts into a trust, escrow, or similar vehicle gives the employee a present economic benefit requiring current inclusion.
3. For each type of arrangement, what taxable year governs inclusion of the deferred compensation under § 451 principles.

## Decision

- The IRS concluded that a mere bookkeeping reserve and an employer’s unsecured contractual promise to pay in the future generally do not create current taxable income to a cash-method employee.
- The IRS concluded that an arrangement that funds or secures deferred amounts in a manner that provides the employee a present, vested, nonforfeitable interest can cause current inclusion under economic benefit or constructive receipt principles.
- Accordingly, some deferred compensation arrangements permit deferral until actual payment, while others require inclusion when the funded right arises, depending on the plan’s structure.

## Legal Principles

- Under § 451 constructive receipt concepts, income is not currently includible if the employee lacks the present ability to draw upon the amount and the employee’s control is subject to substantial limitations or restrictions.
- Credits to an internal corporate account or reserve, without segregation, trust treatment, or current employee access, typically do not constitute constructive receipt for cash-method employees.
- The economic benefit doctrine may require current inclusion when property or money is set aside for the employee so that the employee obtains a present, nonforfeitable right that is effectively the equivalent of cash and is insulated from the employer’s general creditors.
- The tax timing for nonqualified deferred compensation depends on whether the arrangement is unfunded and unsecured (deferral until payment) versus funded or secured for the employee’s benefit (potential current inclusion).

## Conclusion

Rev. Rul. 60-31 distinguishes between unfunded, unsecured deferred compensation promises—generally taxable to cash-method employees only when paid—and funded or secured arrangements that can confer a present economic benefit or constructive receipt, triggering current income inclusion.


Rev. Rul. 60-31, 1960-1 C.B. 174 (1960)