Rev. Rul. 56-366

Advice has been requested whether it is permissible to ignore a definite predetermined formula for determining the profits to be shared, presently contained in an existing employees' profit-sharing or stock bonus plan which is qualified under section 165(a) of the Internal Revenue Code of 1939, and make contributions in any amounts desired and obtain deductions therefor within the applicable limits, in view of the definition of a profit-sharing plan set forth in section 39.165-1(a)(2) of Regulations 118 and section 29.165-1(a) of Regulations 111, both as last amended by T. D. 6189, page 972 of this Bulletin, approved July 2, 1956, which omits the requirement for such a definite predetermined formula, contained in the regulations prior to the last amendment.

Deductions under section 23(p) of the Code are generally allowable only in the taxable year in which the contribution or compensation is paid, regardless of the fact that the taxpayer may make his return on the accrual basis, except that overpayments may be carried forward as provided for in subparagraphs (A), (C), and (F) of section 23(p)(1) of the Code, and, as provided by section 23(p)(1)(E) of the Code, a taxpayer on the accrual basis may make payment within 60 days after the close of the taxable year of accrual. The provision for payment after the close of the taxable year of accrual, however, is not applicable unless, during the taxable year on account of which the contribution is made, the taxpayer incurs a liability to make the contribution, the amount of which is accruable under section 43 of the Code for such taxable year.

Accordingly, the contribution must either be made during the taxable year under consideration, or, in the case of a taxpayer on the accrual basis who makes a contribution within 60 days after the close of the taxable year of accrual, the taxpayer must incur a liability to make the contribution, the amount of which is accruable under section 43 of the Code for such taxable year. If the plan is amended prior to the close of the taxable year, such liability will be incurred in accordance with the amendment. The amendment need not be executed with any degree of formality but, as prescribed by section 39.165-1(a)(1) of Regulations 118, it must conform to the following requisites:

1. It must be in writing. In this respect, it must be signed by persons competent to bind the parties before the close of the taxable year under consideration.

2. It must be definite so as to constitute part of the definite written program and arrangement which is the plan.

3. It must be communicated to the employees. This must be done before the contribution is made and before the close of the taxable year under consideration.

4. It must be part of the plan which has been established and is maintained by the employer.

I. T. 4055, C. B. 1951-3, 30, holds that deductions for contributions to an employees' qualified profit-sharing trust are allowable under the conditions and within the limitations of section 23(p)(1)(C) of the Code only to the extent required by the terms of the plan of which the trust is a part, and that payments in excess of the required amounts are not available as carry-overs and are not deductible in a subsequent year. To the extent that I. T. 4055 limits the allowable deduction for contributions by a predetermined formula for determining profits to be shared, it is hereby modified.