UNITED STATES TAX COURT


AMERICAN STORES COMPANY AND SUBSIDIARIES, Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 19182-94.                Filed March 31, 1997.



     P made contractually required monthly
contributions to 39 multiemployer pension plans. P
also provided vacation pay benefits to its employees
under various plans. For its TYE Jan. 31, 1987 (8701),
P obtained an extension of the time within which to
file its U.S. consolidated corporate income tax return
to Oct. 15, 1987. For its TYE Jan. 30, 1988 (8801), P
obtained an extension of the time within which to file
its U.S. consolidated corporate income tax return to
Oct. 17, 1988. On its return for TYE 8801 P deducted,
in addition to the 12 monthly contributions based on
units of service worked during the taxable year,
contributions based on units of service worked during
months after the last day of TYE 8801 but before the
due date of the return as extended. On its returns for
TYE 8701 and TYE 8801 P also deducted, in addition to
its vacation pay liabilities based on units of service
worked during those years, vacation pay liabilities
based on units of service worked during months after
                                 - 2 -

     the last days of the taxable years but before the due
     dates of the returns as extended.
          1. Held: pension contributions, based on units
     of service worked after the close of TYE 8801 and
     before Oct. 17, 1988, were not on account of P's TYE
     8801, as required by sec. 404(a)(6), I.R.C., and are
     therefore not deductible in that year. Lucky Stores,
     Inc., & Subs. v. Commissioner, 

(1996),
     supplemented by T.C. Memo. 1997-70, followed.
          2. Held, further, vacation pay, based on units of
     service worked after the close of TYE 8701 or TYE 8801
     and before the due date of the return for such year as
     extended, was not earned in TYE 8701 or TYE 8801, as
     required by sec. 463(a)(1), I.R.C., and is therefore
     not deductible in such year.


     Frederick J. Gerhart, Thomas E. Doran, Stephen

DiBonaventura, and Scott D. Price, for petitioner.

     Thomas R. Lamons, C. Glenn McLoughlin, and David L. Miller,

for respondent.



                               OPINION

     NIMS, Judge:   Respondent determined the following

deficiencies in petitioner's Federal income tax:

     Taxable year ending (TYE)                Deficiency

          February 2,   1985                  $3,704,320
          February 1,   1986                     726,452
          January 31,   1987                  43,266,274
          January 30,   1988                  29,480,791

     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years at

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.
                                 - 3 -

     After concessions, the following 2 issues remain for us to

resolve in the present proceeding:       (1) Whether petitioner, in

its taxable year ending January 30, 1988 (TYE 8801), properly

deducted certain contributions to multiemployer pension plans

attributable to services performed after the conclusion of that

tax year, and (2) whether petitioner properly deducted certain

vacation pay liabilities pursuant to section 463 in its taxable

year ended January 31, 1987 (TYE 8701) and in TYE 8801.       The

amount of the disputed pension contribution deduction is

$37,839,040.20.   The amounts of the disputed vacation pay

deductions are $24,171,499 in TYE 8701 and $17,927,808 in TYE

8801.

     The facts have been fully stipulated and are found

accordingly.   This reference incorporates the stipulated facts

and attached exhibits.

     Petitioner is a Delaware corporation.       At the time the

petition was filed, petitioner's principal place of business was

located in Salt Lake City, Utah.

                            Background

     Petitioner is the common parent of an affiliated group of

corporations, and files a consolidated Federal income tax return

annually.   Petitioner filed the petition on behalf of all

eligible members of the group.     For Federal income tax purposes,

petitioner elected to file corporate income tax returns on the

basis of a 52-53 week fiscal year ending on the Saturday nearest
                                - 4 -

January 31 of any given year.    Petitioner requested and received

an extension to October 15, 1987, to file its United States

consolidated corporate income tax return for TYE 8701.

Petitioner requested and received an extension to October 17,

1988, to file its United States consolidated corporate income tax

return for TYE 8801.

     Petitioner, through its subsidiaries, primarily engages in

the retail sale of food and drug merchandise.      Conjointly, the

subsidiaries represent one of the nation's leading retailers,

operating combination drug/food stores, super drug centers, drug

stores and food stores.   During the years in question, petitioner

conducted its principal business activities through wholly owned

subsidiaries and operating divisions, including:      Acme Markets,

Inc., Jewel Food Stores, Star Market, Jewel OSCO, Alpha Beta

Company, Skaggs Alpha Beta, and Buttrey Food.

     Respondent issued a statutory notice of deficiency on July

26, 1994.   After stipulations of agreement executed by the

parties, the remaining issues are:      (1) Whether petitioner can

deduct in TYE 8801 certain contributions made to various

multiemployer pension plans in the months after January 30, 1988,

but before the extended due date for filing its return, and (2)

whether petitioner is entitled to certain vacation pay accrual

adjustments pursuant to section 463 for TYE 8701 and TYE 8801.
                                 - 5 -

I. The Deductions for Contributions to Collectively Bargained
Plans

     Under applicable Internal Revenue Code provisions, employers

may enter into "qualified" deferred compensation arrangements,

which provide retirement and other benefits to employees and

their beneficiaries through single employer plans, multiple

employer plans, and multiemployer plans.        Plans not established

pursuant to collective bargaining agreements are herein referred

to as Multiple Employer Plans.     Plans established and maintained

pursuant to such agreements are henceforth referred to as

Multiemployer Plans or, alternately, as CBA Plans.        In both

Multiple Employer Plans and Multiemployer Plans, the

contributions of participating employers are pooled and used to

provide benefits to all covered employees, former employees, and

their beneficiaries.   Section 413(b) contains certain rules

exclusively applicable to CBA Plans, which are the plans involved

in the instant case.

     At all relevant times, petitioner was obligated to

contribute money to 39 CBA Plans.        These plans were defined

benefit pension plans.   By stipulation of the parties, arguments

were limited to the 10 plans to which petitioner contributed the

largest amounts in TYE 8801 (the Top 10 Plans).        The parties have

agreed to apply the Court's decision with respect to the Top 10

Plans to petitioner's contributions to the other 29 plans.          The
                               - 6 -

following schedule sets forth the the Top 10 Plans and their

respective annual accounting periods (plan years) for Federal tax

purposes:

            CBA Plan                               Plan Year

Southern California UFCW Union & Food              April 1 -
     Employers Joint Pension Trust Fund            March 31

UFCW Union and Participating Food Indus-           January 1 -
     try Employers Tri-State Pension Fund          December 31

Northern California Retail Clerk Union             January 1 -
     & Food Employers Joint Pension Trust Fund     December 31

Southern California Meat Cutters Union             July 1 -
     & Food Employers Pension Trust Fund           June 30

UFCW Union Local 56 Retail Meat                    July 1 -
     Pension Fund                                  June 30

UFCW International Union Industry                  July 1 -
     Pension Fund                                  June 30

Western Conference of Teamsters                    January 1 -
     Pension Trust                                 December 31

Southern California Retail Clerks                  January 1 -
     Union & Drug Employers Pension Fund           December 31

Warehouse Employees Union Local 169 &              January 1 -
     Employers Joint Pension Fund                  December 31

UFCW Local 72 & Participating Employers            January 1 -
     Pension Fund                                  December 31

     During the calendar years 1986, 1987, and 1988, more than

1,000 employers made contributions on behalf of thousands of

unionized employees and their beneficiaries to many of the plans.

Other plans were smaller.   At all times between January 1, 1986
                               - 7 -

and December 31, 1988, each of the plans qualified as a

Multiemployer Plan within the meaning of the Employee Retirement

Income Security Act of 1974 (ERISA), Pub. L. 93-406, 88 Stat. 829

and was a plan to which section 413(b) and Subtitle E of Title IV

of ERISA applied.   Moreover, at all times during this period,

each of the plans qualified under section 401(a) as a pension

plan, and, accordingly, the trusts related to each CBA Plan were

exempt from taxation under section 501.

     Generally, at the end of each month, petitioner calculated

the amount of its required contribution to each CBA Plan by

multiplying the hours or weeks (units of service) worked by

covered employees in such month by fixed monetary rates (the

contribution rate) set by the collective bargaining agreement.

Increases or decreases in the number of covered employees, along

with increases or decreases in the units of service worked by

covered employees, required petitioner to make a separate

calculation for its required contribution to each plan every

month.   Contributions to each CBA Plan attributable to units of

service worked in a given month were due on the 30th of the month

after the units of service were worked.   On occasion,

contributions to plans were made on a quarterly basis, based upon

covered services performed during the quarter.
                               - 8 -

     For taxable years prior to TYE 8801, petitioner's

subsidiaries computed their deductions for plan contributions in

one of 2 ways.   Skaggs Alpha Beta and Jewel Food Stores (for one

of the plans to which it contributed) calculated the

contributions paid to the plans during the corporations' taxable

years (regardless of when the covered services related to the

contributions were performed) and claimed that total as their

deduction.   Alpha Beta Company, Osco Drug Company, Acme Markets,

and Jewel Food Stores (for the other plans to which it

contributed) calculated the contributions related to covered

services performed during their taxable years (regardless of when

those contributions were paid) and claimed that total as their

deduction.   For each subsidiary, and for each taxable year ending

prior to petitioner's TYE 8801, the total amount claimed as a

deduction for that year did not include any contributions

attributable to covered services performed after the end of that

taxable year.

     For TYE 8801, Skaggs Alpha Beta (for the plans to which it

contributed) and Jewel Food Stores (for one of the plans to which

it contributed) computed their deductions for contributions to

the plans claimed on petitioner's Federal income tax returns by

adding together the contributions actually made during TYE 8801

and those contributions made after the end of TYE 8801, but
                               - 9 -

before the due date for filing petitioner's return (i.e., October

17, 1988).   Jewel Food Stores calculated its deduction for

contributions to 2 other plans by adding together contributions

calculated with reference to covered services performed in TYE

8801 and those contributions calculated with reference to covered

services performed after TYE 8801 that were made before the due

date for filing petitioner's return.   Alpha Beta Company, Osco

Drug Company, and Acme Stores each calculated its deduction for

contributions to the plans by adding together the contributions

made with reference to covered services performed in TYE 8801 and

those contributions which were related to covered services

performed after TYE 8801 and were made after the end of TYE 8801

but before the due date for filing petitioner's return.

Petitioner claimed a deduction for contributions to the plans of

$101,787,413.   Of that amount, $57,607,463 was reflected on

petitioner's books as a TYE 8801 expense, and $44,179,950 was

reflected on Schedule M-1 as an adjustment to petitioner's book

income.

     Of the $44,179,950 deducted by petitioner on the Schedule M-

1, $116,285 pertained to amounts contributed by Skaggs Alpha Beta

and Star Markets in February 1988 (and thus was attributable to

covered services performed during TYE 8801).   The remaining
                             - 10 -

$44,063,665 deducted by petitioner on Schedule M-1 related to

covered services performed after the end of TYE 8801.

     For taxable years after TYE 8801, petitioner reported

deductions based upon contributions attributable to covered

services performed during the taxable year (but not previously

deducted for tax purposes), as well as contributions attributable

to covered services performed after the close of the taxable

year, where the contributions were made before the filing date

for petitioner's Federal income tax return.    In contrast to TYE

8801, for taxable years before and after TYE 8801, petitioner

deducted only contributions calculated with reference to covered

services performed over a 12-month period.    At no time did

petitioner file a Form 3115 (Application for Change in Accounting

Method) concerning the method used to arrive at its deduction for

contributions to the plans claimed on its return for TYE 8801.

     In her notice of deficiency, respondent disallowed the

$44,179,950 Schedule M-1 adjustment upon determining that

petitioner could not properly deduct contributions attributable

to covered services performed after the close of the taxable year

as so-called grace period contributions.   Respondent did not

disallow the $57,607,463 deduction representing contributions

made by petitioner to the plans attributable to covered services

performed during TYE 8801.
                              - 11 -

     The parties subsequently agreed that petitioner improperly

calculated the amount of the "grace period contributions".

Petitioner admits that it overstated its deduction for "grace

period contributions" by $6,224,901.16, and acquiesces in the

adjustments made by respondent to that extent.   Thus, after that

concession, the amount remaining in dispute in regard to

contributions made by petitioner after January 30, 1988, and

before October 15, 1988, was $37,955,325.20.   Respondent concedes

that contributions in the amount of $116,285 (which were

attributable to amounts contributed by Skaggs Alpha Beta and Star

Markets in February 1988 for covered services performed in

January 1988) were properly deductible.    As a result, the portion

of the "grace period contributions" remaining at issue is

$37,839,040.20.

     The administrator of each plan was a party independent of

petitioner and was appointed by the Board of Trustees of the

plan.   Under the terms of the collective bargaining agreements,

the plans were entitled to collect interest and/or late fees on

delinquent contributions from employers.   At all times during the

relevant period, each CBA Plan administrator had procedures to

monitor the actual dates of receipt of each employer's required

contribution.
                              - 12 -

     As required by ERISA sections 104 and 4065, 88 Stat. 847,

1032, and sections 6057(b) and 6058(a), after the close of each

plan year the administrator of each CBA Plan filed Annual Reports

(Forms 5500) and accompanying schedules with the IRS.     On

Schedule B of Form 5500, each CBA Plan reported for its plan year

only those contributions paid under the applicable agreement for

units of service worked during that particular year.     Only a

defined benefit plan subject to the minimum funding standards of

section 412 and ERISA section 302, 88 Stat. 869, is required to

file a Schedule B.   One purpose of the completion of the Schedule

B is to demonstrate compliance or noncompliance with such minimum

funding standards.   At all times during the relevant periods,

each CBA Plan satisfied the minimum funding requirements of

section 412 and ERISA section 302.     Petitioner's subsidiaries'

monthly contributions to each CBA Plan were reported on Schedule

B for that plan year in which the related units of service of the

covered employees had been worked.

     While nothing in the collective bargaining agreements

prohibited petitioner from contributing more than the amount

required, or contributing amounts in advance of the date that

such amounts became due, no provision explained how the plan

administrator should credit an advance contribution from an

employer.   Generally, advance pension contributions were not made
                              - 13 -

to the plans and, with the exception of advance contributions

made with respect to vacation time and severance pay, petitioner

did not make any such contributions during the taxable years at

issue.   No contributions were made by petitioner to any of the

CBA Plans during the relevant period that were not required by

collective bargaining agreements.

     Petitioner's subsidiaries, for public financial reporting

purposes, accounted for their contributions to the CBA Plans in

one of 2 ways.   Skaggs Alpha Beta (for the plans to which it

contributed) and Jewel Food Stores (for one of the plans to which

it contributed) calculated contributions paid to the plans during

the corporations' taxable years (regardless of when the covered

services related to the contributions were performed) and

included that total as their contributions expense.   For the

other plans to which Jewel Food Stores contributed, and for the

plans to which Alpha Beta Company, Osco Drug Company, and Acme

Markets contributed, the contributions related to covered

services performed during the corporations' taxable years were

treated as contributions expenses (regardless of when those

contributions were paid).   For each of the subsidiaries, and for

each taxable year, the amount included as a contributions expense

did not include contributions attributable to covered services

performed after the end of the taxable year.
                                - 14 -

     The taxable year of a contributing employer need not match

the plan year of a plan to which such employer contributes.

Administrators of Multiemployer Plans are not cognizant of the

taxable years adopted by contributing employers.   Moreover, under

the terms of the collective bargaining agreements, petitioner was

not required to report to the plan administrators the deductions

it claimed for contributions.

     In preparing its funding standard account under section 412

for each plan year, no CBA Plan considered contributions made by

contributing employers for hours worked by covered employees

following such plan year.   Under each CBA Plan for all relevant

periods, the earning, crediting, and vesting of a participant's

benefit remained independent of the making of any specific

contribution of an employer.

     The parties stipulated that, if called to testify by

petitioner, the employee of petitioner most familiar with its

subsidiaries' contribution obligations to each of the plans would

state that, as of January 31, 1988, he had no reason to believe

that the amount of any of the subsidiaries' monthly contribution

obligation to any such plan would significantly decrease in the

8-month period following January 31, 1988.   Furthermore, the

amount of total employer contributions actually paid to each of

the plans relating to covered services performed during each plan
                              - 15 -

year is an amount which the plan administrator could have, as of

the beginning of such plan year, reasonably anticipated to be

made by employers with respect to covered services performed

during such plan year.

      Petitioner consulted with an accounting firm, Ernst &

Whinney, about accelerating deductions for contributions to the

CBA Plans made after the end of a tax year and before the due

date of the tax return for that year (herein for convenience

referred to as grace period contributions).     The parties

stipulated that Ernst & Whinney marketed this type of

acceleration to certain clients that were making required

contributions to multiemployer defined benefit pension plans

during this period.

      Petitioner was never notified by any plan representative

that the statutory deduction limit was exceeded with respect to

any plan for any relevant period.      Petitioner did not notify any

plan representative that the monthly contributions calculated

with reference to covered services performed after January 31,

1988, were to be applied to months ending on or before January

31, 1988.

II.   The Vacation Pay Deductions

      Petitioner provides many of its approximately 130,000

employees with job-related benefits, including vacation pay and
                                 - 16 -

other types of compensated leave.         A number of factors determine

the type and amount of vacation pay available to an employee,

such as:   (1) The employing company; (2) the employee's job

classification; (3) the employee's tenure with the employing

company; and (4) the employee's status as a union or non-union

worker.

      Petitioner deducted $78,110,485 attributable to its vacation

pay liability on its return for TYE 8701, $24,171,499 of which is

in dispute in the instant case (the 1987 Vacation Pay).

Petitioner deducted $62,841,617 attributable to its vacation pay

liability on its return for TYE 8801, $17,927,808 of which

remains in dispute (the 1988 Vacation Pay).

A.   The Terms of the Vacation Benefits Plans

      Petitioner provided vacation pay benefits to its employees

under three basic plans:      (1) The American Stores Co. general

vacation plan and other plans providing similar benefits (herein

collectively referred to as the General Plan); (2) the Star

Markets Non-Union Plan (the Star Markets Plan); and (3) the Acme

Markets Union Plans (the Acme Markets Plans).

      1.   The General Plan

      The General Plan is the vacation benefit plan most widely

used by petitioner.    Under this plan, once a covered employee

reaches the first anniversary of his initial hire date, he has
                                - 17 -

the right to take one week of paid vacation.    Following an

employee's first year of continuous service, the plan operates

somewhat differently.    As of each January 1, an employee's

vacation pay benefits are determined based on the next

anniversary of his initial hire date.     This calculated amount is

referred to as the employee's "leave entitlement".    Only those

individuals continuously employed by petitioner for the 12-month

period ending on December 31 of each year obtain a leave

entitlement.   The General Plan permits an employee to take his

entire leave entitlement as of January 1.    Thus, for example, an

employee who worked for petitioner since July 1, 1985, had the

right to take 1 week of vacation upon reaching July 1, 1986.    On

January 1, 1987, the same employee was able to take 2 weeks of

leave, since the employee was expected to have 2 years of service

by July 1, 1987.

     The following schedule reflects the leave entitlement

available to employees under the General Plan:

                               Salaried

                1   week after 1 year of service
                2   weeks after 2 years of service
                3   weeks after 5 years of service
                4   weeks after 10 years of service
                5   weeks after 20 years of service

                                Hourly

                1 week after 1 year of service
                2 weeks after 2 years of service
                              - 18 -

                3 weeks after 5 years of service
                4 weeks after 12 years of service
                5 weeks after 20 years of service

The General Plan calculates years of service using the

anniversary of an employee's date of hire (the anniversary date).

The plan uses an employee's job category (salaried or hourly

worker) as of January 1 of each year to calculate the amount of

the employee's leave entitlement for the calendar year.   Leave

entitlements generally must be used by the end of the calendar

year; no full week increments of leave may extend beyond that

time.   Moreover, employees do not receive compensation for the

portion of their leave entitlement which remains unused at the

end of the calendar year.

     Leave entitlement for employees covered by the General Plan

vests ratably over the 1-year period between successive

anniversary dates.   Consequently, an employee's leave entitlement

as of January 1 normally includes both vested and nonvested

portions.   The vested portion is coextensive with services which

have already been performed by the employee.   The nonvested

portion of the leave entitlement will vest (on a weekly or

monthly basis) as future services are performed by the employee.

Thus, an employee with an anniversary date of July 1 of a given

year will be vested in one-half of his vacation pay for that year
                               - 19 -

as of January 1.   The other half of the leave entitlement will be

nonvested at that time.

     Although the General Plan enables a covered employee to take

his entire leave entitlement anytime after January 1, if an

employee leaves his job prior to reaching his anniversary date,

he must reimburse petitioner for any used portion of the

nonvested leave entitlement.   Moreover, if a covered employee

retires or voluntarily terminates employment with unused leave

entitlement, petitioner will only pay the employee for the vested

leave entitlement.   The employee does not have a right to receive

payment for any unused nonvested leave entitlement.

     An employee receives vacation pay under the General Plan

equal to the salary he would normally receive when the vacation

is actually taken.   Vacation pay is not based on the employee's

salary at the beginning of the calendar year.

     2.   The Star Markets Plan

     Star Markets provides vacation pay benefits to certain non-

union employees under a plan which differs from the General Plan.

Star Markets permits an employee to take 1 week of vacation after

1 year of continuous service, and 2 weeks of vacation after 2

years of continuous service.   The plan also permits employees

with 5 years or more of continuous service to take additional

vacation pay benefits.    The actual amount of vacation for which
                               - 20 -

an employee qualifies hinges on the employee's anniversary date

with Star Markets.    The following shows the vacation schedule for

employees who qualify for 1 week of vacation under the Star

Markets Plan:

If Anniversary Date falls               Vacation may be taken between:
between:

January 1 & April 30                    May 1 & October 31

May 1 & December 31                     Upon reaching Anniversary

     The Star Markets Plan permits an employee on the payroll as

of April 30 to take 2 weeks of vacation after completing 2 years

of continuous service with Star Markets.      The following shows the

vacation schedule for employees who qualify for 2 weeks of

vacation under the Star Markets Plan:

If Anniversary Date falls               Vacation may be taken between:
between:

January 1 & April 30                    May 1 & October 31

May 1 & December 31                     First Week: Between
                                        May 1 & October 31
                                        Second Week: Upon
                                        reaching Anniversary

     The parties have stipulated that, by the end of TYE 8701 and

TYE 8801, employees satisfied three-quarters of the service

necessary under the Star Markets Plan to qualify for 1 or 2 weeks

of vacation, regardless of their respective anniversary dates.

That is to say, the parties have stipulated that all employees

were on the payroll as of April 30.      The three-quarters of the
                              - 21 -

service satisfied (the 9-month span from May 1 to January 30 or

31) corresponds to an employee's "accumulated benefits" since,

contrary to the General Plan, vacation benefits do not vest

ratably under the Star Markets Plan.    (Nonaccumulated benefits

consist of that one-quarter of the vacation entitlement measured

from the end of the relevant tax year (January 30 or 31) to the

applicable date of grant (April 30).)

     For employees who qualify for 1 or 2 weeks of vacation pay,

the Star Markets Plan vacation season extends from May 1 through

December 31 of each year.   Unless an individual terminates

employment prior to reaching his anniversary date, he becomes

fully vested in the first and second weeks of vacation as of the

date he is eligible to take his vacation under the plan (with the

exception of an employee starting between May 1 and December 31,

who can take his first week between May 1 and October 31, but

does not vest until his anniversary date).

     All vacation under the Star Markets Plan must commence

within the calendar year in which an employee reaches his

anniversary date with Star Markets.    No vacation benefits may be

accumulated from year to year.   (The record does not disclose how

an employee whose anniversary date falls in the last week of

December is supposed to take his vacation.    We presume that, as

long as his vacation commences before the end of that calendar
                                - 22 -

year, it may continue into the next calendar year without

forfeiture.)    As with the General Plan, the Star Markets Plan

calculates vacation pay benefits using an employee's rate of pay

in effect at the time the vacation is actually taken; vacation

pay is not premised on an employee's salary at the beginning of

the calendar year.

          3.     The Acme Markets Plans

     Acme Markets offers vacation pay benefits to certain union

employees.     The Acme Markets Plans' vacation season extends from

May 1 through September 30 of each year for the first and second

weeks of vacation, and May 1 through April 30 of the next

calendar year for the third, fourth, and fifth weeks of vacation.

In contrast with the Star Markets Plan, employees covered by the

Acme Markets Plans vest ratably in a specified amount of leave

for each month or each week they work for Acme Markets between

May 1 of one calendar year and April 30 of the next year.    The

amount of leave in which an employee vests depends on the

employee's length of continuous service with Acme Markets.    As of

May 1 of each year, an employee will be fully vested in the

vacation pay he is expected to take during the vacation season

beginning on that date.

     All vacations under the Acme Markets Plans must be used

during the relevant vacation season; no vacation benefits accrue
                               - 23 -

from one vacation season to the next.      A covered employee who

terminates employment before reaching the May 1 start of a

vacation season retains the right to receive payment for vacation

pay benefits he has vested in since May 1 of the preceding year.

However, he has no right to receive vacation pay for nonvested

vacation benefits he would have vested in by the May 1 start of

the next vacation season.   An employee receives vacation pay

under the Acme Markets plan equal to the salary he would normally

receive when the vacation is actually taken.

B.   Petitioner's Section 463 Deductions

      For the General Plan and the Acme Markets Plans, petitioner

included both the unused yearend vested and nonvested vacation

benefits in calculating its vacation pay accruals under section

463 for the relevant period.   In some instances, petitioner

applied inflation factor adjustments to the unused yearend vested

and nonvested vacation benefits when calculating claimed accruals

under section 463.   The parties agree that petitioner may include

the unused yearend vested vacation benefits and related

adjustments when calculating its vacation pay accruals under

section 463.   Respondent disputes, however, petitioner's

inclusion of the unused yearend nonvested vacation benefits and

adjustments when calculating the vacation pay accruals under

section 463 for TYE 8701 and TYE 8801.
                              - 24 -

     Petitioner also included the yearend Star Markets

accumulated and nonaccumulated benefits when calculating the

claimed vacation pay accruals under section 463 for the relevant

period.   Star Markets also applied inflation factor adjustments

to the yearend accumulated and nonaccumulated benefits when

calculating the claimed vacation pay accruals under section 463.

The parties agree that Star Markets may include the yearend

accumulated benefits and corresponding adjustments when

calculating its vacation pay accruals under section 463.

However, respondent disputes the inclusion of the nonaccumulated

benefits and adjustments when calculating accruals for TYE 8701

and TYE 8801.

                            Discussion

     The issues we must decide are:    (1) Whether petitioner

properly deducted contributions made to Multiemployer Plans

attributable to services performed after TYE 8801 on its return

for that year; and (2) whether petitioner properly deducted

certain nonvested or nonaccumulated vacation pay liabilities

pursuant to section 463 on its returns for TYE 8701 and TYE 8801.

For the following reasons, we hold that the timing of

petitioner's deductions was improper with respect to both issues.

Issue 1. The Deductions for Grace Period Contributions to
Multiemployer Plans
                                - 25 -

     During the relevant period, petitioner's subsidiaries made

monthly contributions to 39 CBA Plans on behalf of their

unionized employees.   For each CBA Plan, the amount of the

monthly contribution was obtained by multiplying the units of

service worked by employees covered under the respective CBA Plan

by the contribution rate.

     For each taxable year prior to TYE 8801, petitioner deducted

12 monthly contributions based on covered hours worked during

such year.   Then, as to TYE 8801, petitioner changed its method

of calculating its deduction.    For that year, petitioner obtained

an extension to October 17, 1988, of the time within which to

file its return.   Between the date on which TYE 8801 ended and

the extended due date of the return, petitioner's subsidiaries

made 7 or in some cases 8 monthly contributions to the CBA Plans,

and claimed these grace period contributions as a deduction for

TYE 8801, in addition to the 12 monthly contributions.

     Section 404(a) specifies that employer contributions to

exempt trusts under various types of qualified employee benefit

plans are not deductible under any other Code provision, but if

they would otherwise be deductible, they are deductible under

section 404, subject to articulated limitations as to the amount

deductible in any taxable year.     The limitations on the amount

deductible are contained in section 404(a)(1)(A), which also
                              - 26 -

refers to the deduction of contributions "In the taxable year

when paid".   However, section 404(a)(1)(A) does not specify the

method by which the actual amount of the deduction may be

determined.

     The applicable limitations on contributions to CBA Plans in

this case are contained in clauses (i) and (iii) of section

404(a)(1)(A), which together provide that the overall limitation

is the greater of the amount necessary to satisfy the minimum

funding standard of section 412(a) for plan years ending within

the employer's taxable year, and an amount equal to the normal

cost of the plan, augmented by any amount necessary to amortize

unfunded costs equally over 10 years.   In addition, the flush

language at the end of subparagraph (A) of the foregoing section

provides, among other things, that the maximum amount deductible

for the taxable year is to equal the full funding limitation for

such year determined under section 412.

     As a further refinement of the section 404(a) limitations on

the deductibility of contributions, section 413 provides certain

rules that apply exclusively to "Collectively bargained plans,

etc."   Section 413(a) provides that subsection (b) applies to any

plan (and any trust thereunder) maintained pursuant to a CBA;

i.e., a CBA Plan.   Various paragraphs of subsection (b) provide

rules that relate to CBA Plans, but the relevant paragraph for
                              - 27 -

the instant matter is paragraph (7), which furnishes a blueprint

for applying section 404(a) limitations insofar as they relate to

CBA Plans.   Section 413(b)(7) states:

         Deduction Limitations.-- Each applicable limitation
      provided by section 404(a) shall be determined as if
      all participants in the plan were employed by a single
      employer. The amounts contributed to or under the plan
      by each employer who is a party to the agreement, for
      the portion of his taxable year which is included
      within such a plan year, shall be considered not to
      exceed such a limitation if the anticipated employer
      contributions for such plan year (determined in a
      manner consistent with the manner in which actual
      employer contributions for such plan year are
      determined) do not exceed such limitation. If such
      anticipated contributions exceed such a limitation, the
      portion of each such employer's contributions which is
      not deductible under section 404 shall be determined in
      accordance with regulations prescribed by the
      Secretary.

      Petitioner concedes in its brief that the facts and the

issue before us are "essentially identical" to that of a case

before the Court at the time the briefs were filed, which we have

since decided in favor of the Commissioner.      See Lucky Stores,

Inc., & Subs. v. Commissioner, 

(1996) (Lucky Stores

I).   Many of the arguments petitioner poses in the instant case

were discussed at length in Lucky Stores I, or in the

Supplemental Memorandum Opinion, Lucky Stores, Inc., & Subs. v.

Commissioner, T.C. Memo. 1997-70 (Lucky Stores II), and we need

not retread the same ground here.      However, we shall address

certain of petitioner's arguments pertaining to the deduction
                               - 28 -

limitations of section 404(a)(1)(A) and section 413(b)(7), and

their relation to section 404(a)(6).

     For the reasons detailed below, we conclude that petitioner,

by its misguided attempt to use the expanded time of payment

provision of section 404(a)(6) to augment its current

contribution deduction, has run afoul of the deduction limits for

individual employer contributors imposed by sections 404(a)(1)(A)

and 413(b)(7).    See Lucky Stores, Inc., & Subs. v. Commissioner,

.

     Sections 404(a)(1)(A) and 413(b)(7) place limits on the

overall amount that may be deducted by all contributing employers

to a CBA Plan for portions of their respective tax years included

in a plan year.    They do not detail the method by which the

actual amount of the deduction of an individual employer

contributor may be calculated.    Nevertheless, in the absence of

regulations promulgated by the Secretary, we think these sections

outline the approach that should be taken to determine the

permissible amount of each employer's deductions for

contributions to a CBA Plan.    The dominant themes we extrapolate

from section 413(b)(7) to aid us in this regard are those of

consistency and predictability.

     Section 413(b)(7) provides a necessary fiction for employer

contributors to ascertain whether they will exceed the overall
                                - 29 -

deduction limitation of section 404(a)(1)(A) for a given plan

year since:   (1) They cannot know the exact amount of their

required contributions for a plan year until the units of service

are actually completed by their employees; (2) their tax years do

not necessarily correspond with one another; and (3) employer

contributors are not required to report to plan administrators

the deductions they claim for contributions.       Section 413(b)(7)

states that all employers' contributions for a plan year will not

exceed the overall limit imposed by section 404(a)(1)(A) if the

total anticipated contributions for the plan year do not exceed

such limit.   Anticipated contributions for a plan year must be

determined in a manner consistent with that in which actual

contributions are determined.    Sec. 413(b)(7).     Actual

contributions are calculated by plan administrators based on

units of service worked within the 12-month plan year.

     Petitioner presumes that, once the total anticipated

contributions are found not to exceed the overall deductible

limit, it can thereafter elect to augment the amount of its

actual contributions for its tax year pursuant to section

404(a)(6) to take advantage of any leftover overall limitation

for the corresponding plan year (the difference between full

funding under section 412 and all anticipated employer

contributions for that plan year).       Any other approach,
                              - 30 -

petitioner contends, in effect recalculates anticipated

contributions, which defeats Congress' intent in using the word

"anticipated".   Petitioner is mistaken on 2 counts.   First,

except to the limited extent discussed below, none of

petitioner's contributions qualify for section 404(a)(6)

treatment.   Second, petitioner fails to comply with the

individual deduction limits of section 404(a)(1)(A) and section

413(b)(7).

     Section 404(a)(6) states:

        Time When Contributions Deemed Made.-- For purposes
     of paragraphs (1), (2), and (3), a taxpayer shall be
     deemed to have made a payment on the last day of the
     preceding taxable year if the payment is on account of
     such taxable year and is made not later than the time
     prescribed by law for filing the return for such
     taxable year (including extensions thereof). [Emphasis
     added.]

If a taxpayer fulfills the above conditions, section 404(a)(6)

automatically applies; no election is required or contemplated

under the statute.   The operative language is "shall".

     In arguing that it has complied with the foregoing

conditions, petitioner relies heavily on Rev. Rul. 76-28, 1976-1

C.B. 106, which offers guidelines to interpret the meaning of the

phrase "on account of".   In pertinent part, the ruling states:

     a payment made after the close of an employer's taxable
     year to which amended section 404(a)(6) applies shall
     be considered to be on account of the preceding taxable
     year if (a) the payment is treated by the plan in the
     same manner that the plan would treat a payment
                              - 31 -

      actually received on the last day of such preceding
      taxable year of the employer, and (b) either of the
      following conditions is satisfied.

           (1) The employer designates the payment in
      writing to the plan administrator or trustee as a
      payment on account of the employer's preceding taxable
      year, or

           (2) The employer claims such payment as a
      deduction on his tax return for such preceding taxable
      year * * *. [Rev. Rul. 76-28, 1976-1 C.B. at 107;
      emphasis added.]

The underscored language above illustrates that Rev. Rul. 76-28

offers those employers to which it applies the opportunity for

what is in effect an election under section 404(a)(6).      In Lucky

Stores I, we did not need to address the weight to be afforded

Rev. Rul. 76-28 in the context of CBA Plans.    Lucky Stores, Inc.,

& Subs. v. Commissioner, 

.    We held that, in any

event, grace period contributions based on services performed

after the close of the taxable year were not "on account of" the

earlier tax year in that the taxpayer had not proven that the

"same treatment requirement" of Rev. Rul. 76-28 was satisfied.

grace period contributions that we find to be "on

account of" TYE 8801 and which, consequently, must be deducted in

that year, are any delinquent payments and the payments for

services performed in the last month of TYE 8801 but not paid

until the first month of TYE 8901.)
                              - 32 -

      We think that an individual employer's contributions and

ensuing deductions for its tax year, in order to comport with

anticipated contributions for the plan year on which the section

413(b)(7) deduction limit is based, must be limited to those

contributions attributable to services performed over a 12-month

period.   Lucky Stores, Inc., & Subs. v. Commissioner, 

.   Section 413(b)(7) states that each limit under section

404(a) shall be determined as if all plan participants were

employed "by a single employer", which mandates uniformity of tax

treatment for employer contributors even as their tax years are

widely disparate.   As a result, petitioner may not unilaterally

and arbitrarily expand its deduction limitation, and thereby

increase the amount of its deduction for its tax year, by

including contributions in its tax year in a manner at odds with

how anticipated contributions previously had been determined for

the plan year in which its tax year falls.   

to

one of petitioner's arguments, we recognize that, in certain

limited situations, where the same plan year includes both the

last day of an employer's tax year and the entire 8-1/2 month

grace period that follows the tax year, the use of section

404(a)(6) in the manner advocated by petitioner, if permitted,

would have no effect on an individual employer's anticipated

contributions for the plan year.   However, many employer
                              - 33 -

contributors would not fall under this category due to their

widely varying tax years.   Since these employer contributors

could not also use section 404(a)(6) without impermissibly

distorting their anticipated contributions, the requirement of

uniform tax treatment would be violated if the individual

employer whose anticipated contributions would be unaffected were

able so to use section 404(a)(6).      Sec. 413(b)(7).)

     Under the 12-month limitation discussed above, anticipated

contributions are easily forecast at the outset of a plan year;

no recalculation is ever required.      In order to arrive at

anticipated employer contributions, each employer can examine

prior years' Forms 5500 which indicate actual contributions to a

plan for units of work performed during a plan year.

Alternatively, an employer can ask the plan administrator to

indicate the amount of contributions it expects to be due for

units of service performed under the plan during the year.

     Petitioner acknowledges that section 413(b)(7) establishes a

means "whereby the party with the most information (i.e., the

multiemployer plan) can determine in advance whether employer

contributions will exceed the deductible limit."      Yet, under

petitioner's theory, a plan administrator could make no such

determination.   If an employer contributor could arbitrarily

expand its actual contributions for its tax year by "electing" to
                               - 34 -

do so under section 404(a)(6), anticipated contributions for the

corresponding plan year would become indeterminate and,

therefore, unreliable.    They would no longer approximate the

amount of actual contributions for a plan year.    This, in turn,

would cause the section 413(b)(7) fiction to become unworkable,

leading to the inability of a plan to prospectively determine

whether the overall limit would be exceeded.

     Petitioner attempts to finesse this point by positing that,

whereas section 404(a)(6) deems a contribution to be made in an

earlier tax year, section 413(b)(7) measures employer

contributions that are expected to be actually made to a

Multiemployer Plan during its plan year.    Under this reasoning,

the treatment of contributions pursuant to section 404(a)(6) does

not affect the limits under section 413(b)(7).    Petitioner

asserts that section 404(a)(6) "expressly limits this deemed

treatment" of grace period contributions in the preceding tax

year to section 404(a).    Petitioner then concludes that the tax

year in which a contribution is deducted is "wholly irrelevant"

under section 413(b)(7).

     We disagree with the preceding disjunctive analysis.

Petitioner ignores that section 413(b)(7) is merely an amplifying

refinement of section 404(a) in the context of CBA Plans.      See

Lucky Stores, Inc., & Subs. v. Commissioner, 

.
                              - 35 -

Section 413(b)(7) even refers directly to section 404(a):      "Each

applicable limitation provided by section 404(a) shall be

determined".   As such, sections 404(a) and 413(b)(7) cannot be

read separately.   Together, they enable individual employer

contributors to determine their deduction limits in the tenebrous

context of overlapping tax and plan years.    Consequently, section

404(a)(6), by its reference to section 404(a)(1) through (3), has

an impact on section 413(b)(7).

     Petitioner maintains that, if an individual employer's tax

treatment of its contributions affects the deductibility of all

contributions, administrators and other contributing employers

could never know whether a contribution was in fact deductible.

That would no doubt be true under petitioner's approach, in which

an employer's tax treatment is subject to its unilateral

allocation of grace period contributions.    However, such a

problem never arises if an employer contributor premises its

deduction on services performed in its 12-month tax year.

     Petitioner argues that the rationale of Airborne Freight

Corp. v. United States, 76 AFTR 2d 95-7497, 96-1 USTC par. 50,004

(W.D. Wash. 1995), should prevail in the instant case.    However,

as we noted in Lucky Stores II, the District Court did not

directly confront the question of section 404(a) deduction

limitations.   Lucky Stores, Inc., & Subs. v. Commissioner, T.C.
                              - 36 -

Memo. 1997-70.   Rather, the court summarily opined that, because

the taxpayer was late in filing its 1989 tax return, it could not

have interfered with the ability of other employers to calculate

and claim their deductions.   Airborne Freight Corp. v. United

States, 76 AFTR 2d 95-7497, at 95-7499, 96-1 USTC par. 50,004, at

83,015 (W.D. Wash. 1995).   The District Court held that, since

the "plan-wide deductible limit" had not been exceeded, the

disputed deductions were permissible.    

conclusion can

only be reached retrospectively, which is precisely what

petitioner (correctly) opposes as contrary to Congress' intent.

In addition, this holding does not recognize an employer

contributor's individual deduction limit.      We respectfully

disagree with the District Court's analysis.

     In our view, limiting each employer's deductions to

contributions based on services performed in its 12-month tax

year leads to the following salubrious results:      (1) Deductions

are predictable since they do not hinge on section 404(a)(6); and

(2) no employer can usurp a greater share of a plan year's

overall deduction limit at another's expense based on the

vagaries of when its tax year ends in relation to that of other

employers or when it files its return.   Cf. Airborne Freight

Corp. v. United States, 76 AFTR 2d 95-7497, at 95-7499, 96-1 USTC

par. 50,004, at 83,015 (W.D. Wash. 1995) ("It seems only fair to
                              - 37 -

require that those employers who choose to file their tax returns

later must accept the risk of possible limitations on their

ability to claim deductions.").

     Finally, sections 404(a) and 413(b)(7) offer employers a

powerful incentive to participate in qualified plans.      Employers

obtain the significant tax advantage of a deduction for plan

contributions in many cases years before the corresponding income

is recognized by their employees.      (In general, employee

participants are not taxed until the time they receive

distributions from a qualified plan, whereas an employer's

contributions to a qualified plan are deductible when paid to the

trust.   In contrast, for nonqualified plans, an employer's

contributions are not deductible when paid; they are deductible

only when the employee participant reports the amount of the

contribution as income.   Sec. 404(a)(5).)     However, sections

404(a) and 413(b)(7) impose restraints which cannot be

disregarded.   Petitioner baldly seeks to garner an additional tax

benefit, permanent tax deferral, by its one-time bunching of up

to 20-1/2 months of deductions in TYE 8801 for each of the 39

Multiemployer Plans to which it contributed.      See Lucky Stores,

Inc., & Subs. v. Commissioner, T.C. Memo. 1997-70.      We are not

convinced that Congress intended section 404(a)(6) to be read so

expansively, or in a manner inconsistent with section 413(b)(7),
                              - 38 -

in furtherance of such a dubious goal.     We therefore hold that

pension contributions, based on units of service worked after the

close of TYE 8801 and before October 17, 1988, were not "on

account of" TYE 8801, as required by section 404(a)(6), and are

therefore not deductible in that year.

Issue 2.   The Vacation Pay Deductions

     We now turn to the issue of whether certain vacation

benefits were "earned" pursuant to section 463 by the end of TYE

8701 and TYE 8801 such that petitioner could take deductions for

vacation pay liabilities in those years.       Section 463 was

repealed by section 10201(a) of the Omnibus Budget Reconciliation

Act of 1987, Pub. L. 100-203, 101 Stat. 1330-387, effective for

taxable years beginning after December 31, 1987.

     Prior to repeal, section 463 provided as follows:

          (a) Allowance Of Deduction.-- At the election of a
     taxpayer whose taxable income is computed under an
     accrual method of accounting, if the conditions of
     section 162(a) are otherwise satisfied, the deduction
     allowable under section 162(a) with respect to vacation
     pay shall be an amount equal to the sum of--

          (1) a reasonable addition to an account
     representing the taxpayer's liability for vacation pay
     earned by employees before the close of the taxable
     year and paid during the taxable year or within 8 1/2
     months following the close of the taxable year * * *

                *    *    *    *       *   *      *

     Such liability for vacation pay earned before the close
     of the taxable year shall include amounts which,
     because of contingencies, would not (but for this
                              - 39 -

     section) be deductible under section 162(a) as an
     accrued expense. * * * [Emphasis added.]

The Tax Reform Act of 1986, Pub. L. 99-514, sec. 1165(a), 100

Stat. 2511, amended section 463(a)(1) for tax years beginning

after December 31, 1986.   Prior to the amendment, the section

read "and expected to be paid during the taxable year or within

12 months following the close of the taxable year" in lieu of the

underscored language above.

     For our present purposes, it is helpful to review the

history of vacation pay liability deductions antedating the

enactment of section 463 by the Act to Amend the Tariff Schedules

of the United States, Pub. L. 93-625, sec. 4(a), 88 Stat. 2108,

2109, for taxable years beginning after December 31, 1973.    Prior

to 1954, in 2 published rulings under the 1939 Code, I.T. 3956,

1949-1 C.B. 78 and G.C.M. 25261, 1947-2 C.B. 44 (no date given),

the IRS ruled that liability for vacations with pay may, with

respect to some employees, be terminated, if the employment

relationship is severed prior to the scheduled vacation period.

Nevertheless, it is stated that this contingency should not

preclude "the accrual of vacation pay at the end of the taxable

year in which the services are performed, since, with respect to

the individual employee at the end of such year, the employer

would be justified in anticipating that the liability will be

paid".   I.T. 3956, 1949-1 C.B. 78 (emphasis added).
                              - 40 -

     Despite the existence of these taxpayer-friendly rulings,

courts imposed a stricter standard for the accrual of vacation

pay liabilities in instances where earned vacation pay

entitlements were forfeitable due to post-yearend contingencies.

E.g., E.H. Sheldon & Co. v. Commissioner, 

(1952),

affd. in part and revd. in part 

(6th Cir. 1954);

Tennessee Consol. Coal Co. v. Commissioner, 

(1950).

     In light of these decisions, the IRS issued Rev. Rul. 54-

608, 1954-2 C.B. 8, which revoked I.T. 3956 and modified G.C.M.

25261, 1947-2 C.B. 44.   The ruling stated that employers must

"clearly establish" the fact of liability to individual employees

by the end of a tax year to accrue vacation pay in that year.

Rev. Rul. 54-608, 1954-2 C.B. at 9-10.   Consequently, if an

employee had to remain employed beyond the end of the year and

until the scheduled vacation period in order to fix the

employer's liability, respondent did not consider the liability

to be accruable.

     To prevent hardship to taxpayers who had relied on I.T.

3956, Congress continually delayed the effective date of Rev.

Rul. 54-608 while it studied the vacation pay issue.   See Denver

& Rio Grande W. R.R. v. Commissioner, 

, 575-576 nn.8,

9 (1962).   Congress subsequently enacted section 463 in direct

response to the strict accrual doctrine set forth in the ruling.
                                - 41 -

The Senate report for Pub. L. 93-625 states that the repeal of

I.T. 3956 "creates hardships for taxpayers who have been accruing

vacation pay under plans which do not meet the requirements of

the strict accrual rules set forth in * * * [Rev. Rul. 54-608]."

S. Rept. 93-1357 (1974), 1975-1 C.B. 517, 521-522.     The Senate

report further states that section 463 "has been developed as a

result of * * * [Congress' study of this problem] and insofar as

accrued vacation pay is concerned the committee believes it

represents the permanent legislation promised by the committees."

1975-1 C.B. at 522.

     Section 463 permitted taxpayers to elect to establish a

reserve account for the accrual of vacation benefits.      It

authorized a yearend deduction for "earned" but unpaid vacation

benefits which otherwise failed to satisfy the strict accrual

test due to the existence of contingencies which could result in

the forfeiture of leave entitlement.     Sec. 463(a)(1).   To qualify

for deduction, the benefits also had to be payable to employees

within 12 months after the end of the tax year (a period later

reduced to 8-1/2 months for tax years beginning after December

31, 1986).   Sec. 463(a)(1).

     Petitioner accrued and deducted all vacation benefits that

it expected to pay within 12 months of the close of TYE 8701 and

within 8-1/2 months of the close of TYE 8801.     The parties agree
                                - 42 -

that petitioner is entitled to the deductions, but they part

company on the proper timing.    Respondent contends that the 1987

vacation pay should have been deducted in TYE 8801 and the 1988

vacation pay ought to have been deducted in TYE 8901.

     Although the term "earned" is not expressly defined in the

statute or the legislative history, the parties both maintain

that vacation pay is earned if it pertains to services performed

before the close of a taxable year.      The gravamen of the dispute,

therefore, lies in whether vacation benefits under the General

Plan, the Star Markets Plan and the Acme Market Plans were in

fact attributable to services performed before the close of the

taxable year for which the deductions were sought.

     For reasons which follow, we hold that the vacation benefits

were not earned before the end of each taxable year within the

meaning of section 463.   Consequently, the deductions must be

taken in the subsequent taxable years.

A. Vacation Benefits Are Partially Based on Services Performed
After the End of the Taxable Years

     1.   The General Plan

     Petitioner argues that the only service requirement for

receiving leave entitlement under the General Plan is employment

for the 12 consecutive months preceding the grant date.

Respondent, on the other hand, asserts that employees earned

their respective vacation benefits only as services were rendered
                               - 43 -

over the 12-month period between consecutive anniversaries of the

employees' initial dates of employment.

      It is true for the General Plan that the granting of leave

entitlement is conditioned on the performance of services during

the 12 consecutive months preceding the date of grant (January

1).   Nevertheless, as petitioner concedes, despite the employee's

eligibility to take vested and nonvested leave after January 1,

"the amount of the Leave Entitlement is based on the next

anniversary of the employee's date of hire."    As such, the leave

entitlement is partially attributable to services performed after

the end of the tax year.    Thus, while an employee may have had to

work the 12 months before January 1 to qualify for any vacation

benefits, the extent of the benefits received upon satisfying

that precondition hinged upon the years of service he was

expected to complete on his next anniversary date.    As evidence

of this, vacation pay benefits are calculated using an employee's

rate of pay at the time the vacation is actually taken, rather

than the rate of pay at the end of the taxable year.

Furthermore, petitioner's own vacation plan brochures used the

term "earned" in the same manner as respondent does here.

      2.   The Star Markets Plan and Acme Markets Plans

      That vacation pay benefits are partially based on services

performed after the end of the relevant taxable year is even more
                              - 44 -

apparent under the Star Markets Plan and Acme Markets Plans.

Unlike the General Plan, the Star Markets Plan and Acme Markets

Plans provide no advance leave in the form of leave entitlement

to employees.   Rather, employees are not permitted to take any

leave until all of the plans' service requirements are fulfilled.

This occurs, at the earliest, on May 1 (the grant date), which is

3 months after the close of petitioner's taxable year.

     Moreover, as with the General Plan, vacation pay benefits

under the Star Markets Plan and Acme Markets Plans are calculated

using an employee's rate of pay at the time the vacation is

actually taken, rather than the rate of pay at the end of the

taxable year.

B. Respondent's Disallowance of Claimed Deductions Does Not
Render Section 463 Meaningless

     1.   The General Plan

     Respondent contests petitioner's inclusion of the General

Plan unused yearend nonvested leave entitlements in its

calculation of vacation pay accruals under section 463 for TYE

8701 and TYE 8801.   Petitioner asserts that vacation pay is

earned as of the end of a tax year even if employees must perform

additional services after the end of that year to absolutely fix

an employer's obligation to provide the vacation pay.    Petitioner

posits that the fact that an individual employee did not have a

nonforfeitable right to such vacation pay at the close of the
                              - 45 -

taxable year determines only whether the pay is accrued or

vested, not whether it is earned.      Petitioner submits that, when

stripped of its trappings, respondent's position is simply that

"earned" means accrued, which thereby renders section 463

meaningless.

     Respondent, on the other hand, contends that nothing in

section 463 signals that vacation pay is earned simply because

the employer permits its employees to take vacations.     Respondent

acknowledges that, under the terms of the General Plan, whether

vacation pay was earned happened to coincide with whether it had

vested.   Nevertheless, she states that, in making her

determination, she was not swayed by inappropriate factors such

as whether the vacation benefits were vested, nonvested, or

contingent, or whether the vacation benefits were subject to

conditions subsequent or precedent.

     The Court is persuaded that respondent did not rely on a

strict accrual doctrine in contravention of section 463 in

disallowing certain deductions for TYE 8701 and TYE 8801 under

the General Plan.   Strict accrual would prohibit any deduction if

a possibility existed that the vacation benefits could be

forfeited after the end of the taxable year.     See Rev. Rul. 54-

608, 1954-2 C.B. 8.   Such a possibility exists even for the

taxable yearend "vested" benefits under the General Plan, because
                              - 46 -

of what is commonly called a "use-or-lose" provision in the plan.

This provision requires participants to use their allocated

vacation benefits by the end of the calendar year.   If a

participant fails to use all of the allocated leave, he receives

no compensation for the unused leave remaining at the calendar

yearend, and it cannot be carried over to the next year.    Indeed,

it appears to us that the principal reason for allowing an

employee to take all of his leave as of January 1 is to ensure

that all employees were able to take all of their leave

entitlement without creating scheduling conflicts and without

forfeiture.   The use-or-lose provision applies to all leave

allocated to an employee and does not distinguish between taxable

yearend "vested" and "nonvested" benefits.

     Due to the use-or-lose provision, there is no assurance as

of the close of the taxable year that all otherwise "vested"

vacation benefits will be used by participants by the end of the

calendar year.   Nevertheless, while the mere possibility of

forfeiture would have precluded a deduction under the strict

accrual doctrine espoused in Rev. Rul. 

, respondent

did not limit petitioner's deductions to yearend fixed and

nonforfeitable vacation benefits in the instant case.   Rather,

she allowed deductions to the extent they were based on services

performed in that taxable year.
                              - 47 -

     2.   The Star Markets Plan

     Star Markets included both the yearend accumulated and

nonaccumulated benefits in calculating its claimed vacation pay

accruals under section 463 for TYE 8701 and TYE 8801.   Respondent

disputes petitioner's inclusion of the yearend nonaccumulated

benefits in its calculation of accruals under section 463.

Respondent claims she did not consider inappropriate factors such

as whether the vacation benefits were vested, nonvested,

contingent, or subject to conditions subsequent or precedent in

making her adjustments.

     We are convinced that respondent properly focused solely on

whether the vacation pay was earned pursuant to section 463.

Respondent allowed petitioner a deduction based on three-fourths

of the unpaid yearend vacation benefits (May 1 through January 30

or 31), disallowing only the nonaccumulated benefits (January 30

or 31 to April 30), even though none of the benefits vested until

May 1, and employees could not take any leave before their

service requirements were met for the entire year.

     3.   The Acme Markets Plans

     By the end of TYE 8701 and TYE 8801, employees covered by

the Acme Markets Plans would have vested in three-quarters of the

vacation benefits they anticipated receiving in the subsequent

taxable year.   The remaining one-quarter of Acme Markets Plans
                                - 48 -

vacation benefits would fully vest by the May 1 following the end

of those taxable years.     Respondent disputes Acme Markets'

inclusion of the nonvested benefits when calculating its vacation

pay accruals under section 463.

     Respondent correctly focused solely on the services

performed by the end of the taxable year rather than the

substantive rights of plan participants at the close of such

year.     To wit, respondent allowed petitioner a deduction based on

three-fourths of the unpaid yearend vacation benefits despite the

fact the plans did not permit employees to take leave before the

service requirements were fully met, and no benefits were

actually granted until 3 months after the close of petitioner's

taxable year.

     For each of the plans, although respondent did not acquiesce

in petitioner's excessively broad interpretation of section 463,

neither did she disregard statutory language and legislative

history which sought to liberate accruals of vacation pay from

the strictures of Rev. Rul. 54-608.

C. Petitioner's Attempt To Equate the Deductions At Issue with
Deductions Allowed in I.T. 3956 Is Unavailing

        We agree with petitioner that the legislative history

makes clear that section 463 was meant to apply

to the type of vacation pay plan at issue in I.T. 3956, 1949-1

C.B. 78.     However, we are not convinced by petitioner's
                                - 49 -

comparison of the plans at issue in the instant case to the plan

in I.T. 

, despite some shared characteristics.

     In I.T. 

, a calendar year employer negotiated a

vacation pay plan for its union employees pursuant to which

eligible employees received a vacation entitlement on January 1

if they had worked 160 days in the preceding calendar year.      The

employer sought to deduct the vacation entitlement in the year in

which the 160 days had been worked.      The agreement further

provided that vacations could be scheduled from January 1 to

December 31, and that vacation pay was calculated using an

employee's rate of pay at the time the vacation was actually

taken.   Moreover, no vacation with pay was due an employee whose

employment relationship terminated prior to his scheduled

vacation period.

     I.T. 3956 concerned the accrual and deduction of vacation

pay where the service requirements had already been fulfilled

during the preceding calendar year, but where other provisions

(such as termination of employment) could lead to the forfeiture

of the earned leave.   See Latrobe Steel Co. v. Commissioner, 

, 465 (1974); Oberman Manufacturing Co. v. Commissioner,

, 477 (1967); Denver & Rio Grande W. R.R. v.

Commissioner, 

.    Although employees potentially had

to remain employed well after the year of deduction to prevent a
                                - 50 -

forfeiture of their vacation entitlements, those entitlements

were based solely on the 160 days of service rendered in the

preceding calendar year.   The ruling did not address the issue of

leave advances as provided by the General Plan.

     Moreover, unlike I.T. 3956, for each of the plans at issue,

the service requirements had only been partially fulfilled by the

end of the respective taxable years.       Consistent with I.T. 3956,

respondent disallowed petitioner's deductions only to the extent

that the qualifying services had not been performed by the last

day of TYE 8701 and TYE 8801.    Consequently, we hold that

vacation pay, based on units of service worked after the close of

TYE 8701 and TYE 8801 and before the due dates of those returns

as extended, was not earned in TYE 8701 and TYE 8801, as required

by section 463(a)(1), and is therefore not deductible in those

years.

     To reflect the foregoing and issues previously resolved,

                                              Decision will be entered

                                         under Rule 155.