Taxes and Business Decisions 327employees of the corporation on a nondiscriminatory basis with respect to the
plan, thus rendering qualified plans a poor technique for supplementing a com-
pensation package for a highly paid executive.
The second category is nonqualified plans. These come in as many vari-
eties as there are employees with imaginations, but they all share the same dis-
favored tax treatment. The employer is entitled to its deduction only when the
employee pays tax on the money, and if money is contributed to such a plan the
earnings are taxed currently. Thus, if Morris were to design a plan under which
the corporation receives a current deduction for its contributions, Brad will
pay tax now on money he will not receive until the future. Since this is the
exact opposite of what Brad (and most employees) have in mind, Brad will most
likely have to settle for his employer ’s unfunded promise to pay him the de-
ferred amount in the future.
Assuming Brad is interested in deferring some of his compensation, he
and Morris might well devise a plan which gives them as much f lexibility as
possible. For example, Morris might agree that the day before the end of each
pay period, Brad could notify the corporation of the amount of salary, if any,
he wished to defer for that period. Any amount thus deferred would be carried
on the books of the corporation as a liability to be paid, per their agreement,
with interest after Brad’s retirement. Unfortunately, such an arrangement
would be frustrated by the “constructive receipt” doctrine. Using this potent
weapon, the IRS will impose a tax (allowing a corresponding employer deduc-
tion) on any compensation that the employee has earned and might have chosen
to receive, regardless of whether he so chooses. The taxpayer may not turn his
back upon income other wise unconditionally available to him.
Taking this theory to its logical conclusion, one might argue that deferred
compensation is taxable to the employee because he might have received it if
he had simply negotiated a different compensation package. After all, the im-
petus for deferral in this case comes exclusively from Brad; Morris would have
been happy to pay the full amount when earned. But the constructive receipt
doctrine does not have so extensive a reach. The IRS can tax only monies the
taxpayer was legally entitled to receive, not monies he might have received if
he had negotiated differently. In fact, the IRS will even recognize elective de-
ferrals if the taxpayer must make the deferral election sufficiently long before
the monies are legally earned. Brad might, therefore, be allowed to choose de-
ferral of a portion of his salary if the choice must be made at least six months
before the pay period involved.
Frankly, however, if Brad is convinced of the advisability of deferring a
portion of his compensation, he is likely to be concerned less about the irrevo-
cability of such election than about ensuring that the money will be available to
him when it is eventually due. Thus, a mere unfunded promise to pay in the fu-
ture may result in years of nightmares over a possible declaration of bankruptcy
by his employer. Again, left to their own devices, Brad and Morris might well
devise a plan under which Morris contributes the deferred compensation to a
trust for Brad’s benefit, payable to its beneficiary upon his retirement. Yet such