UNITED STATES TAX COURT



     SCHMIDT BAKING COMPANY, INC., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 10458-95.                 Filed November 14, 1996.



     P funded its vacation and severance pay
obligations to its employees for 1991 by purchasing an
irrevocable letter of credit on March 13, 1992. The
letter of credit constituted a transfer of an interest
in substantially vested property, includable in income
of the employees as of that date under sec. 83, I.R.C.
P, an accrual basis taxpayer, deducted the amount of
the letter of credit on its 1991 return on the basis
that it paid the vacation pay within 2-1/2 months of
the close of its 1991 taxable year and was therefore
entitled to the claimed deduction under sec. 83(h),
I.R.C., and sec. 1.83-6(a)(3), Income Tax Regs. R
disallowed the deduction on the ground that the letter
of credit did not constitute payment to the employees
within the 2-1/2 month period with the result that sec.
404(a)(5), I.R.C., and sec. 1.404(b)-1T, Temp. Income
Tax Regs., 51 Fed. Reg. 4321 (Feb. 4, 1986), applied
and the deduction was not allowable to P for its 1991
taxable year. Held, the letter of credit constituted
payment on March 13, 1992, so that sec. 404(a)(5),
                                 - 2 -

     I.R.C., does not apply, and the deduction for vacation
     and severance pay is an allowable deduction for P's
     1991 taxable year under sec. 83(h), I.R.C., and sec.
     1.83-6(a)(3), Income Tax Regs.

     Theodore W. Hirsh, Andrea R. Macintosh, and Frances M.

Angelos, for petitioners.

     Clare J. Brooks, for respondent.



                                OPINION

     TANNENWALD, Judge:     Respondent determined the following

deficiencies in petitioner's Federal income taxes:

     Taxable Year Ended                     Deficiency

       Dec. 26, 1987                       $  6,982.00
       Dec. 31, 1988                        193,182.00
       Dec. 28, 1991                          2,873.00

After concessions, the sole issue for decision is whether

petitioner may deduct for its 1991 tax year amounts for vacation

and severance pay which accrued in that year, were funded within

2-1/2 months of the end of that year, i.e., March 13, 1992, by

means of an irrevocable letter of credit, and were includable in

the income of the employees as of that date.
                                - 3 -

Background

     This case was submitted fully stipulated under Rule 122.1

The stipulation of facts and supplemental stipulation of facts

are incorporated herein by this reference and found accordingly.

     Petitioner, an accrual basis taxpayer, is a corporation with

over 1,300 employees that, at the time of the filing of the

petition, had its principal place of business in Baltimore,

Maryland.    It filed timely Federal income tax returns for the

years at issue with the Internal Revenue Service Center,

Philadelphia, Pennsylvania.

     Petitioner had in place a vacation plan, whereby vacation

earned in the first year could only be taken between January 1st

and December 31st of the following year.    Terminated employees

could get cash for their unused vacation pay with proper notice

to petitioner.    Petitioner also had a plan of severance pay in

the event employees were laid off.

     On March 13, 1992, petitioner purchased an irrevocable

standby letter of credit in the amount of $2,092,421 representing

accrued 1991 liabilities of $1,773,183 for vacation pay and

$319,238 for severance pay.    Petitioner's employees were

designated as the beneficiaries with each employee and the amount

of the accrued benefit to which he or she was entitled separately



1
   Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the taxable years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                               - 4 -

listed.

     The letter of credit was secured by petitioner's general

assets, and its employees were named as sole beneficiaries

thereunder.   Under this arrangement, if petitioner failed to pay

secured vacation benefits, they would be paid by the issuer of

the letter of credit upon the request of the employees' agent,

petitioner's chief financial officer.

     Under applicable bankruptcy law, petitioner's general

creditors had no right with respect to payments under the letter

of credit.

     The parties have stipulated that the letter of credit

represented a transfer of substantially vested interests in

property to the employees for purposes of section 83, and that

the fair market value of the interests was includable in the

employees' gross incomes for 1992 as of the date the interests

were transferred.2

     On its return, timely filed, for the taxable year ending

December 28, 1991, petitioner deducted all liabilities for

vacation and severance pay accrued during that year that were

listed in the letter of credit, in the amount of $2,092,421.    By

way of a net operating loss carryback, petitioner also claimed a



2
   Although we recognize that this stipulation represents a
conclusion of law that may not be binding upon us, we have found
no reason not to utilize it as an element of decision. See
Godlewski v. Commissioner, 

, 203 n.5 (1988); Barnette
v. Commissioner, T.C. Memo. 1992-595, affd. without published
opinion 

(11th Cir. 1994).
                              - 5 -

deduction arising from this payment in the taxable year 1988.

Respondent determined that the 1991 deduction, and hence the

carryback to 1988, was not allowable.

Discussion

     Resolution of the question before us involves an analysis of

several interrelated statutory and regulatory provisions which

can only be described as a semantical exercise worthy of Judge

Learned Hand's famous commentary on the complexity of the

Internal Revenue Code, a commentary which has acquired added

significance in the years since it was first articulated.3   As a

consequence, we set forth that analysis in order to bring into

focus the precise question that we must decide, namely, whether

the amounts of the accrued vacation and severance pay were "paid"

when the letter of credit was purchased on March 13, 1992.

Statutory Framework

     The parties have stipulated that the purchase of the

irrevocable letter of credit was a transfer under section 83,

resulting in includability of the value of the interest

transferred in the income of the employees as of the date of


3
     [T]he words of such an act as the Income Tax * * *
     merely dance before my eyes in a meaningless
     procession: cross-reference to cross-reference,
     exception upon exception * * *. * * * at times I
     cannot help recalling a saying of William James about
     certain passages of Hegel: that they were no doubt
     written with a passion of rationality; but that one
     cannot help wondering whether to the reader they have
     any significance save that the words are strung
     together with syntactical correctness. * * * [Hand,
     "Thomas Walter Swan," 57 Yale L.J. 167, 169 (1947).]
                               - 6 -

transfer, i.e., March 13, 1992.   Petitioner claims the deduction

at issue based on section 83(h)4 and section 1.83-6(a)(3), Income

Tax Regs.5   Section 83(h) allows a deduction in the year the

amount of a transfer is included in the employees' income.

Section 1.83-6(a)(3)(first sentence), Income Tax Regs., allows an

accrual basis employer an earlier deduction, "in accordance with

his method of accounting", where there has been a transfer of

"substantially vested" assets to the employee.



4
    Sec. 83(h) provides:

           (h) Deduction by Employer.--In the case of a
      transfer of property to which this section applies or a
      cancellation of a restriction described in subsection
      (d), there shall be allowed as a deduction under
      section 162, to the person for whom were performed the
      services in connection with which such property was
      transferred, an amount equal to the amount included
      under subsection (a), (b), or (d)(2) in the gross
      income of the person who performed such services. Such
      deduction shall be allowed for the taxable year of such
      person in which or with which ends the taxable year in
      which such amount is included in the gross income of
      the person who performed such services.
5
    Sec. 1.83-6(a), Income Tax Regs. provides in pertinent part:

           (3) Exceptions. Where property is substantially
      vested upon transfer, the deduction shall be allowed to
      such person in accordance with his method of accounting
      (in conformity with sections 446 and 461). In the case
      of a transfer to an employee benefit plan described in
      § 1.162-10(a) or * * * [other transfers not applicable
      in this case], section 83(h) and this section do not
      apply.

However, should another section require that petitioner not use
its usual method of accounting, sec. 1.461-1(a)(2)(iii)(A),
Income Tax Regs., provides that the sec. 461 rules will defer to
that other provision.
                               - 7 -

      Section 1.83-6(a)(3)(second sentence), Income Tax Regs.,

provides that section 83(h) and the regulations thereunder do not

apply to "a transfer to an employee benefit plan described in

§ 1.162-10(a)".   Section 1.162-10(a), Income Tax Regs.,6 provides

that, as a general rule, a taxpayer may deduct vacation pay and

severance pay under that section.   However, deductions for

amounts used to provide benefits under a "deferred compensation

plan of the type referred to in section 404(a) * * * shall be

governed by the provisions of section 404 and the regulations

issued thereunder."   Sec. 1.162-10(a)(third and fourth

sentences), Income Tax Regs.


6
    Sec. 1.162-10(a), Income Tax Regs., provides:

      Certain employee benefits.
           (a) In General. Amounts paid or accrued by a
      taxpayer on account of injuries received by employees
      and lump-sum amounts paid or accrued as compensation
      for injuries are proper deductions as ordinary and
      necessary expenses. Such deductions are limited to the
      amount not compensated for by insurance or otherwise.
      Amounts paid or accrued within the taxable year for
      dismissal wages, unemployment benefits, guaranteed
      annual wages, vacations, or a sickness, accident,
      hospitalization, medical expense, recreational,
      welfare, or similar benefit plan, are deductible under
      section 162(a) if they are ordinary and necessary
      expenses of the trade or business. However, except as
      provided in paragraph (b) of this section [not
      applicable herein], such amounts shall not be
      deductible under section 162(a) if, under any
      circumstances, they may be used to provide benefits
      under a stock bonus, pension, annuity, profit-sharing,
      or other deferred compensation plan of the type
      referred to in section 404(a). In such an event, the
      extent to which these amounts are deductible from gross
      income shall be governed by the provisions of section
      404 and the regulations issued thereunder. [Emphasis
      added.]
                               - 8 -

      Section 404(a) covers deductions in respect of contributions

to pension trusts, employees' annuities, stock bonus and profit-

sharing trusts, foreign trusts, and other plans "deferring the

receipt of * * * compensation."    Section 404(a)(5) deals with

deductions in respect of "other plans" specifically including

deductions for "vacation pay which is treated as deferred

compensation".7   Section 404(b) provides that any method or

arrangement that has the effect of a plan deferring the receipt

of compensation or other benefits for employees will be treated

as a deferred compensation plan.    Section 1.404(b)-1T A-2,

Temporary8 Income Tax Regs., 51 Fed. Reg. 4312, 4321-4322 (Feb.

4, 1986), provides:

           (a) For purposes of section 404(a), (b), and (d),
      a plan, or method or arrangement, defers the receipt of
      compensation or benefits to the extent it is one under
      which an employee receives compensation or benefits
      more than a brief period of time after the end of the
      employer's taxable year in which the services creating


7
    Sec. 404(a)(5) provides:

           (5) Other plans.--If the plan is not one included
      in paragraph (1), (2), or (3), in the taxable year in
      which an amount attributable to the contribution is
      includible in the gross income of employees
      participating in the plan, but, in the case of a plan
      in which more than one employee participates only if
      separate accounts are maintained for each employee.
      For purposes of this section, any vacation pay which is
      treated as deferred compensation shall be deductible
      for the taxable year of the employer in which paid to
      the employee.
8
   Temporary regulations are accorded the same weight as final
regulations. Truck & Equipment Corp. v. Commissioner, 98 T.C.
l41, 149 (1992); Zinniel v. Commissioner, 

(1987),
affd. 

(7th Cir. 1989).
                                 - 9 -

      the right to such compensation or benefits are
      performed. The determination of whether a plan, or
      method or arrangement, defers the receipts of
      compensation or benefits is made separately with
      respect to each employee and each amount of
      compensation or benefit. * * *

           (b)(1) A plan, or method or arrangement, shall be
      presumed to be one deferring the receipt of
      compensation for more than a brief period of time after
      the end of an employer's taxable year to the extent
      that compensation is received after the 15th day of the
      3rd calendar month after the end of the employer's
      taxable year in which the related services are rendered
      ("the 2 1/2 month period"). * * *

                     *   *   *    *      *   *   *

           (c) A plan, or method or arrangement, shall not be
      considered as deferring the receipt of compensation or
      benefits for more than a brief period of time after the
      end of the employer's taxable year to the extent that
      compensation or benefits are received by the employee
      on or before the end of the applicable 2 1/2 month
      period. * * *    [Emphasis added.]


      To summarize our complicated march through the Code and

regulations, section 1.83-6(a)(3), Income Tax Regs., implementing

section 83(h), refers us to section 1.162-10(a), Income Tax

Regs., which refers us to section 404(a)(5), which refers us to

section 404(b)(1) and (2), as implemented by section 1.404(b)-1T,

Temporary Income Tax Regs., 51 Fed. Reg. 4321 (Feb. 4, 1986),

which contains the test that we must apply.

      Section 1.404(b)-1T, Temporary Income Tax Regs., provides

that if the benefits were "received" within the 2-1/2 month

period,9 the amounts would not be deferred compensation, they


9
    Two and 1/2 months is often used interchangeably with 75 days.
                                                    (continued...)
                             - 10 -

would not be paid pursuant to "plans" under section 404(b), they

would not be described in section 404(a)(5), and thus section

1.162-10(a), Income Tax Regs., would not apply, and petitioner

would be entitled to its deduction under section 83(h) and

section 1.83-6(a)(3), Income Tax Regs.

     According to the regulations, if the benefits in question

were not "received" within the 2-1/2 month period, it is presumed

that the amounts would be deferred compensation, they would be

paid pursuant to "plans" under section 404(b), they would be

described in section 404(a)(5), and then section 1.162-10(a),

Income Tax Regs., would apply, sending us back to section

404(a)(5) for the deductibility of the amounts.

     The parties have stipulated that the amounts specified in

the letter of credit were includable in the employees' gross

income under section 83 as of the date of transfer.   Petitioner

maintains that since the amounts were vested, funded, and

includable within the 2-1/2 month period, they must have been

"received" within that period for purposes of section 1.404(b)-

1T, Temporary Income Tax Regs.   Respondent contends that mere

includability in income is not enough, that "received" requires

that the employee must have been able to put the amount included

"in his pocket" for the 2-1/2 month "window" under the



9
 (...continued)
For an illuminating discussion of the correlation between 2-1/2
months and 75 days see Mansuss Realty Co. v. Commissioner, 

(2d Cir. 1944), affg. 

(1943).
                                - 11 -

regulations to apply.   Thus, we must decide whether includability

of income is sufficiently equivalent to the receipt of income to

satisfy the 2-1/2 month rule.    An inextricable element in

arriving at this decision is whether petitioner "paid" the

benefits within the 2-1/2 month period since the statutory

provision, i.e., section 404(a)(5), speaks in terms of payment in

respect of vacation pay and, as will subsequently appear, see

infra pp. 15-17, the legislative history reveals that Congress

considered that payment provided the foundation for the

application of the 2-1/2 month rule.     Indeed, this emphasis on

payment, i.e., "paid", may account for respondent's "in the

pocket" interpretation of the word "received" in the temporary

regulations, for it is clear that, if the employees could put the

vacation pay in their pockets, it must have been paid to them.

     Section 404(a)(5) (first sentence) allows a deduction in

respect of deferred compensation plans generally when an item is

"includible in the gross income of employees" (emphasis added),

as does section 1.404(a)-12(b), Income Tax Regs.     Similarly,

section 83(h) allows a deduction when an item is included in the

employee's income.   Furthermore, section 1.461(h)-4T, Temporary

Income Tax Regs., 51 Fed. Reg. 4329 (Feb. 4, 1986), indicates

that includability is the test of receipt for section 404.10      In


10
   Sec. 1.461(h)-4T, Q&A-1, Temporary Income Tax Regs., 51 Fed.
Reg. 4312, 4329, provides:

     Q-1:   What is the relationship between the economic
                                                    (continued...)
                                 - 12 -

this frame of reference, it is at least arguable that

includability in income and receipt are matching elements with

the result that since the amounts represented by the letter of

credit were includable in the income of the employees as of March

13, 1992, they were "received" by the employees on that date and

the "window" provided by the 2-1/2 month rule of section

1.404(b)-1T(c) has been satisfied.        Such a conclusion would be

based upon the proposition that the word "received" in the

regulations, standing as it does without any qualifying adjective

such as "actually", means nothing more than received for income

tax purposes.

        However, we find it necessary to go beyond this simple

analysis because the governing statutory provision, section

404(a)(5), speaks in terms of payment as well as includability in

income.     Before proceeding to discuss the implications of this

statutory thrust, there are several tangential elements which

should be noted.     First, the 2-1/2 month rule is not specifically



10
     (...continued)
         performance requirements of section 461(h) and sections 404
         and 419?
         A-1: * * * In the case of a contribution or compensation
         subject to section 404 or 419, pursuant to the authority
         under section 461(h)(2), economic performance occurs (i) in
         the case of a plan subject to section 404, either as the
         contribution is made under the plan or, if section 404(a)(5)
         is applicable, as an amount attributable to such
         contribution is includible in the gross income of an
         employee. * * * [Emphasis added.]

See discussion of sec. 1.461(h)-4T, which mirrors this
explanation, in Rev. Rul. 88-68, 1988-2 C.B. 117.
                              - 13 -

set forth in a statutory provision dealing with deferred

compensation arrangements but is a creature of regulations and

recognition in legislative history.    See Avon Products, Inc. v.

United States, 

(Fed. Cir. 1996); Truck & Equipment

Corp. v. Commissioner, 

, 145-154 (1992).    Second, we

recognize that it does not necessarily follow that funds have

been paid because they have been constructively received for

income tax purposes.   See Gillis v. Commissioner, 

, 17

(1974).   Third, the decided cases are less than models of clarity

in delineating distinctions in meaning among "included",

"received", and "paid", a view reflected in the opinion of the

Court of Appeals for the Ninth Circuit in Albertson's Inc. v.

Commissioner, 

, 543 (9th Cir. 1994), affg. 

(1990).   The Ninth Circuit noted that, for nonqualified plans,

"the employer is ordinarily allowed no deduction for

contribution, payments or benefits until they are taxed to the

employee", which it equated with a denial of the "employer's

deduction until the deferred amount is included in the employee's

income", meaning in its view that "current law * * * defers the

* * * deduction "until the year of payment.    The court concluded

that "an employer cannot take tax deductions for payments to its

employees until the DCA participants include those payments in

their taxable income--that is, until the employees actually

receive the compensation promised to them."    Albertson's Inc. v.

(citations omitted and emphasis
                                - 14 -

added).

     Against the foregoing background, we turn to an analysis of

whether there was not only includability in income but also

payment as of March 13, 1992.    If these two elements are found to

be present, we think there need be no further consideration of

the word "received" in the regulations because the combination of

includability and payment must necessarily be equated with

"received".   To better understand our analysis, we repeat the

text of section 404(a)(5):

          (5) Other plans.--If the plan is not one included
     in paragraph (1), (2), or (3), in the taxable year in
     which an amount attributable to the contribution is
     includible in the gross income of employees
     participating in the plan, but, in the case of a plan
     in which more than one employee participates only if
     separate accounts are maintained for each employee.
     For purposes of this section, any vacation pay which is
     treated as deferred compensation shall be deductible
     for the taxable year of the employer in which paid to
     the employee.

     Clearly, section 404(a)(5) on its face provides no clear

guidance to the question before us, since it speaks (first

sentence) in terms of "includable in income" in respect of

deferred compensation other than vacation pay and in terms of

"paid" in respect of vacation pay (second sentence).   Under these

circumstances, we find it appropriate, indeed mandated, that we

look to the legislative history, particularly since that history

articulates the 2-1/2 month rule, which is our main concern.     See

Hospital Corp. of America v. Commissioner, 

(1996),

particularly at 129.   Furthermore, the use of legislative history
                                - 15 -

in this case is particularly appropriate where neither party

questions the validity of the 2-1/2 month rule, but merely its

application.

     Prior to 1987, section 404(a)(5) contained only the first

sentence; the rules governing vacation pay were contained in

section 463, which provided for a deduction based on the

establishment of a reserve.    In 1987, when the Omnibus Budget

Reconciliation Act of 1987, Pub. L. 100-203, 101 Stat. 1330, was

being considered, both the House and Senate proposed to repeal

section 463 and make no change in section 404(a)(5) as it then

stood.    In so doing, the House Ways and Means Committee and the

Senate Finance Committee discussed the proposed action in the

following identical language:

     7.   Reserve for accrued vacation pay (sec. 10121 of the
           bill and sec. 463 of the Code)

                              Present Law

          Under present law, an accrual-method taxpayer
     generally is permitted a deduction in the taxable year
     in which all the events have occurred that determine
     the fact of a liability and the amount thereof can be
     determined with reasonable accuracy (the "all-events"
     test). In determining whether an amount has been
     incurred with respect to any item during the taxable
     year, all events that establish liability for such
     amount are not treated as having occurred any earlier
     than the time economic performance occurs (sec.
     461(h)). With respect to a liability that arises as a
     result of another person's providing services to the
     taxpayer (such as the liability to provide vacation pay
     in exchange for service by an employee), economic
     performance generally occurs when such other person
     provides the services.

          In order to ensure the proper matching of income
     and deductions in the case of deferred benefits (such
                        - 16 -

as vacation pay earned in the current taxable year, but
paid in a subsequent year) for employees, an employer
generally is entitled to claim a deduction in the
taxable year of the employer in which ends the taxable
year of the employee in which the benefit is includible
in gross income (sec. 404(b)). This rule applies to
deferred benefits without regard to the economic
performance rules. Consequently, an employer is
entitled to a deduction for vacation pay in the taxable
year of the employer in which ends the earlier of the
taxable year of the employee for which the vacation pay
(1) vests (if the vacation pay plan is funded by the
employer), or (2) is paid.

      An exception to this rule applies to amounts that
are paid within 2-1/2 months after the close of the
taxable year of the employer in which the vacation pay
is earned. Such amounts are not subject to the
deduction timing rules applicable to deferred benefits,
but are subject to the general rules under which an
employer is entitled to a deduction when performance
occurs (i.e., when the services of the employee for
which vacation pay is earned are performed). Because
amounts paid within 2-1/2 months after the close of the
employer's taxable year generally will qualify for the
exception to the economic performance requirements,
such amounts generally will be deductible for the
preceding taxable year (the year in which the vacation
pay is earned) even though the employee does not
include the benefit in income in the preceding taxable
year.
                *   *   *   *   *   *   *

                  Reasons for Change

     The special rules under present law relating to
the reserve for accrued vacation pay create a disparity
in tax treatment between accrued vacation pay and other
deferred benefits. The committee believes that the
timing of deductions for vacation pay should not be
more favorable than the timing of deductions for other
deferred benefits.

               Explanation of Provision

     The special rule that permits taxpayers a
deduction for additions to a reserve for vacation pay
would be repealed. Accordingly, under the bill,
deductions for vacation pay would be allowed in any
taxable year for amounts paid, or funded amounts that
                              - 17 -

     vest, during the year or within 2-1/2 months after the
     end of the year. [H. Rept. 100-391 at 1061-1062
     (1987); S. Print 100-63 at 143-144 (1987); emphasis
     added.11]

     Respondent argues that a proper reading of the foregoing

language indicates that the committees intended to draw a

distinction between situations where the vacation pay was vested

and funded and where it is paid.   We disagree.   Given a reading

of the entire expression of the committees' viewpoint, we think

they intended to equate, rather than separate, funding and

vesting and payment.   In this connection, we also are of the view

that the broad language of the reports, particularly the

reference to "deferred benefits" with vacation pay, is simply an

example which indicates that the committees intended the 2-1/2

month rule to apply to deferred benefits such as severance pay,

which is involved herein along with vacation pay.

     Respondent further seeks to buttress her position by

pointing to the second sentence of section 404(a)(5) (see supra

note 7) which was added by the conference committee with the

following explanation:

     The conference agreement follows the Senate amendment
     with modifications. The conference agreement provides
     that vacation pay earned during any taxable year, but
     not paid to employees on or before the date that is 2-
     1/2 months after the end of the taxable year, is
     deductible for the taxable year of the employer in
     which it is paid to employees. This provision is an


11
   Almost identical language was contained in the committee
reports when changes in the then existing reserve provision were
made in 1986. H. Rept. 99-426 (1985), 1986-3 C.B. (Vol. 2) 641;
S. Rept. 99-313 (1985), 1986-3 C.B. (Vol. 3) 674.
                              - 18 -

     exception to the general rule for deferred compensation
     and deferred benefits pursuant to which an employer is
     allowed a deduction for the taxable year of the
     employer in which ends the taxable year of the employee
     in which the compensation or benefit is includible in
     gross income. [H. Conf. Rept. 100-495, 920 (1987),
     1987-3 C.B. 193, 201; emphasis added.]

     Respondent argues that this change, coupled with the absence

of any reference to funded and vested amounts, shows that the

conference committee (and hence the Congress which enacted the

added sentence) intended to exclude such amounts from payment and

permit only actual "cash in pocket" to be considered as having

been paid.   Again, we disagree.   A careful reading of the

conference committee report shows that the committee was making a

change only in the timing of the deduction in respect of vacation

pay in contrast to the timing of other deferred compensation

payments, and then only in the context of clear recognition that

its change applied only to payments after the 2-1/2 month period.

     Having found our way through the statutory briarpatch of

sections 83, 162, and 404 and the regulations thereunder, it is

obvious that the disposition of this case turns on a single,

straightforward question, namely whether petitioner paid the

vacation and severance pay within the 2-1/2 month period.

Viewing the totality of the statutory and regulatory provisions

and the pertinent legislative history in their entirety, we think

that petitioner did so by means of an irrevocable parting of

funds, through the creation of the letter of credit, with the

separately designated employee-beneficiaries, which was not
                              - 19 -

subject to the claims of petitioner's creditors and which

constituted amounts includable in the income of such employee-

beneficiaries as of March 13, 1992.

     As a consequence and in accordance with section 1.404(b)-1T,

Temporary Income Tax Regs., neither the vacation nor the

severance pay constituted a deferred compensation plan to which

section 404(a)(5) applies.   This being the case, section 83(h)

and section 1.83-6(a)(3), Income Tax Regs., apply, and petitioner

is entitled to deduct the amounts in question in accordance with

its normal accrual method of accounting, i.e., for its fiscal

year ending December 28, 1991.

     In order to take into account concessions by petitioner on

other issues,

                                 Decision will be entered

                         under Rule 155.