A medical partnership (Permanente), in which respondent
physicians were partners, made an agreement to supply medical
services to members of a health foundation (Kaiser). A portion of
Kaiser's compensation to Permanente was in the form of payments
into a retirement trust for the benefit of Permanente's physicians,
none of whom was eligible to receive the amounts in his tentative
account prior to retirement after specified years of service. No
interest in the account was deemed to vest in a particular
beneficiary before retirement, and a physician's pre-retirement
severance from Permanente would occasion the forfeiture of his
interest, with redistribution to the remaining participants. Under
no circumstances, however, could Kaiser recoup the payments once
made. The Commissioner of Internal Revenue assessed a deficiency
against each partner respondent for his distributive share of the
amount paid by Kaiser, which he had not reported as taxable income.
In this refund suit the District Court, with the Court of Appeals
affirming, held that the payments to the fund were not income to
the partnership because it did not receive and had no "right to
receive" them.
Held: The retirement fund payments, notwithstanding the
fact that they were contributed directly to the trust, were
compensation for services that Permanente rendered under the
medical service agreement, and should have been reported as income
to Permanente; and the individual partners should have included
their shares of that income in their individual returns, since the
existence of conditions upon the actual receipt by a partner of
income fully earned by the partnership is not a relevant factor in
determining its taxability to him. Pp.
410 U. S.
448-457.
450 F.2d 109, reversed and remanded.
POWELL, J., delivered the opinion of the Court, in which BURGER,
C.J., and BRENNAN, STEWART, WHITE, MARSHALL, BLACKMUN, and
REHNQUIST, JJ., joined. DOUGLAS, J., dissented.
Page 410 U. S. 442
MR. JUSTICE POWELL delivered the opinion of the Court.
This is a partnership income tax case brought here by the United
States on a petition for writ of certiorari from the Court of
Appeals for the Ninth Circuit. Respondents, physicians and partners
in a medical partnership, filed suit in the District Court for the
Northern District of California seeking the refund of income taxes
previously paid pursuant to a deficiency assessed by the
Commissioner of Internal Revenue. The case was heard on an agreed
statement of facts, and the District Court ruled in respondents'
favor. 295 F. Supp. 1289 (1968). The Government appealed to the
Ninth Circuit, and that court affirmed the lower court's judgment.
450 F.2d 109 (1971). We agreed to hear this case to consider
whether, as the Government contends, the decision below is in
conflict with precedents of this Court. 405 U.S. 1039 (1972).
Because we find that the decision is incompatible with basic
principles of income taxation as developed in our prior cases, we
reverse.
I
Respondents, each of whom is a physician, [
Footnote 1] are partners in a limited partnership
known as Permanente
Page 410 U. S. 443
Medical Group, which was organized in California in 1949.
Associated with the partnership are over 200 partner physicians, as
well as numerous nonpartner physicians and other employees. In
1959, Permanente entered into an agreement with Kaiser Foundation
Health Plan, Inc., a nonprofit corporation providing prepaid
medical care and hospital services to its dues-paying members.
Pursuant to the terms of the agreement, Permanente agreed to
supply medical services for the 390,000 member families, or about
900,000 individuals, in Kaiser's Northern California Region, which
covers primarily the San Francisco Bay area. In exchange for those
services, Kaiser agreed to pay the partnership a "base
compensation" composed of two elements. First, Kaiser undertook to
pay directly to the partnership a sum each month computed on the
basis of the total number of members enrolled in the health
program. That number was multiplied by a stated fee, which
originally was set at a little over $2.60. The second item of
compensation -- and the one that has occasioned the present dispute
-- called for the creation of a program, funded entirely by Kaiser,
to pay retirement benefits to Permanente's partner and nonpartner
physicians.
The pertinent compensation provision of the agreement did not
itself establish the details of the retirement program; it simply
obligated Kaiser to make contributions to such a program in the
event that the parties might thereafter agree to adopt one.
[
Footnote 2] As might be
expected, a separate trust agreement establishing the
contemplated
Page 410 U. S. 444
plan soon was executed by Permanente, Kaiser, and the Bank of
America Trust and Savings Association, acting as trustee. Under
this agreement, Kaiser agreed to make payments to the trust at a
predetermined rate, initially pegged at 12 cents per health plan
member per month. Additionally, Kaiser made a flat payment of
$200,000 to start the fund and agreed that its
pro rata
payment obligation would be retroactive to the date of the signing
of the medical service agreement.
The beneficiaries of the trust were all partner and nonpartner
physicians who had completed at least two years of continuous
service with the partnership and who elected to participate. The
trust maintained a separate tentative account for each beneficiary.
As periodic payments were received from Kaiser, the funds were
allocated among these accounts pursuant to a complicated formula
designed to take into consideration on a relative basis each
participant's compensation level, length of service, and age. No
physician was eligible to receive the amounts in his tentative
account prior to retirement, and retirement established entitlement
only if the participant had rendered at least 15 years of
continuous service or 10 years of continuous service and had
attained age 65. Prior to such time, however, the trust agreement
explicitly provided that no interest in any tentative account was
to be regarded as having vested in any particular
Page 410 U. S. 445
beneficiary. [
Footnote 3]
The agreement also provided for the forfeiture of any physician's
interest and its redistribution among the remaining participants if
he were to terminate his relationship with Permanente prior to
retirement. [
Footnote 4] A
similar forfeiture and redistribution also would occur if, after
retirement, a physician were to render professional services for
any hospital or health plan other than one operated by Kaiser. The
trust agreement further stipulated that a retired physician's right
to receive benefits would cease if he were to refuse any reasonable
request to render consultative services to any Kaiser-operated
health plan.
The agreement provided that the plan would continue irrespective
either of changes in the partnership's personnel or of alterations
in its organizational structure. The plan would survive any
reorganization of the partnership so long as at least 50% of the
plan's participants remained associated with the reorganized
entity. In the event of dissolution or of a nonqualifying
reorganization, all of the amounts in the trust were to be divided
among the participants entitled thereto in amounts governed by each
participant's tentative account. Under no circumstances, however,
could payments from Kaiser to the trust be recouped by Kaiser: once
compensation was paid into the trust, it was thereafter committed
exclusively
Page 410 U. S. 446
to the benefit of Permanente's participating physicians.
Upon the retirement of any partner or eligible nonpartner
physician, if he had satisfied each of the requirements for
participation, the amount that had accumulated in his tentative
account over the years would be applied to the purchase of a
retirement income contract. While the program thus provided obvious
benefits to Permanente's physicians, it also served Kaiser's
interests. By providing attractive deferred benefits for
Permanente's staff of professionals, the retirement plan was
designed to "create an incentive" for physicians to remain with
Permanente, and thus "insure" that Kaiser would have a "stable and
reliable group of physicians." [
Footnote 5]
During the years from the plan's inception until its
discontinuance in 1963, Kaiser paid a total of more than $2,000,000
into the trust. Permanente, however, did not report these payments
as income in its partnership returns. Nor did the individual
partners include these payments in the computations of their
distributive shares of the partnership's taxable income. The
Commissioner assessed deficiencies against each partner-respondent
for his distributive share of the amount paid by Kaiser.
Respondents, after paying the assessments under protest, filed
these consolidated suits for refund.
The Commissioner premised his assessment on the conclusion that
Kaiser's payments to the trust constituted a form of compensation
to the partnership for the services it rendered, and therefore was
income to the
Page 410 U. S. 447
partnership. And, notwithstanding the deflection of those
payments to the retirement trust and their current unavailability
to the partners, the partners were still taxable on their
distributive shares of that compensation. Both the District Court
and the Court of Appeals disagreed. They held that the payments to
the fund were not income to the partnership, because it did not
receive them and never had a "right to receive" them. 295 F.Supp.
at 1292-1294; 450 F.2d at 114-115. They reasoned that the
partnership, as an entity, should be disregarded, and that each
partner should be treated simply as a potential beneficiary of his
tentative share of the retirement fund. [
Footnote 6] Viewed in this light, no presently taxable
income could be attributed to these cash basis [
Footnote 7] taxpayers because of the contingent
and forfeitable nature of the fund allocations. 295 F.Supp. at
1294-1296; 450 F.2d at 112.
We hold that the courts below erred, and that respondents were
properly taxable on the partnership's retirement fund income. This
conclusion rests on two familiar principles of income taxation,
first, that income is taxed to the party who earns it and that
liability may not be avoided through an anticipatory assignment of
that income, and, second, that partners are taxable on
Page 410 U. S. 448
their distributive or proportionate shares of current
partnership income irrespective of whether that income is actually
distributed to them. The ensuing discussion is simply an
application of those principles to the facts of the present
case.
II
Section 703 of the Internal Revenue Code of 1954, insofar as
pertinent here, prescribes that "[t]he taxable income of a
partnership shall be computed in the same manner as in the case of
an individual." 26 U.S.C. § 703(a). Thus, while the partnership
itself pays no taxes, 26 U.S.C. § 701, it must report the income it
generates and such income must be calculated in largely the same
manner as an individual computes his personal income. For this
purpose, then, the partnership is regarded as an independently
recognizable entity apart from the aggregate of its partners. Once
its income is ascertained and reported, its existence may be
disregarded, since each partner must pay a tax on a portion of the
total income as if the partnership were merely an agent or conduit
through which the income passed. [
Footnote 8]
Page 410 U. S. 449
In determining any partner's income, it is first necessary to
compute the gross income of the partnership. One of the major
sources of gross income, as defined in § 61(a)(1) of the Code, is
"[c]ompensation for services, including fees, commissions, and
similar items." 26 U.S.C. § 61(a)(1). There can be no question that
Kaiser's payments to the retirement trust were compensation for
services rendered by the partnership under the medical service
agreement. These payments constituted an integral part of the
employment arrangement. The agreement itself called for two forms
of "base compensation" to be paid in exchange for services rendered
-- direct per-member, per-month payments to the partnership and
other, similarly computed, payments to the trust. Nor was the
receipt of these payments contingent upon any condition other than
continuation of the contractual relationship and the performance of
the prescribed medical services. Payments to the trust, much like
the direct payments to the partnership, were not forfeitable by the
partnership or recoverable by Kaiser upon the happening of any
contingency.
Yet the courts below, focusing on the fact that the retirement
fund payments were never actually received by the partnership, but
were contributed directly to the trust, found that the payments
were not includable as income in the partnership's returns. The
view of tax accountability upon which this conclusion rests is
incompatible with a foundational rule, which this Court has
described as "the first principle of income taxation: that income
must be taxed to him who earns it."
Commissioner v.
Culbertson, 337 U. S. 733,
337 U. S.
739-740 (1949). The entity earning the income -- whether
a partnership or an individual taxpayer -- cannot avoid taxation by
entering into a contractual arrangement whereby that income is
diverted to some other person or entity. Such arrangements, known
to the tax law as "anticipatory assignments
Page 410 U. S. 450
of income," have frequently been held ineffective as means of
avoiding tax liability. The seminal precedent, written over 40
years ago, is Mr. Justice Holmes' opinion for a unanimous Court in
Lucas v. Earl, 281 U. S. 111
(1930). There, the taxpayer entered into a contract with his wife
whereby she became entitled to one half of any income he might earn
in the future. On the belief that a taxpayer was accountable only
for income actually received by him, the husband thereafter
reported only half of his income. The Court, unwilling to accept
that a reasonable construction of the tax laws permitted such easy
deflection of income tax liability, held that the taxpayer was
responsible for the entire amount of his income.
The basis for the Court's ruling is explicit and controls the
case before us today:
"[T] his case is not to be decided by attenuated subtleties. It
turns on the import and reasonable construction of the taxing act.
There is no doubt that the statute could tax salaries to those who
earned them and provide that the tax could not be escaped by
anticipatory arrangements and contracts, however skilfully devised,
to prevent the salary when paid from vesting even for a second in
the man who earned it. That seems to us the import of the statute
before us, and we think that no distinction can be taken according
to the motives leading to the arrangement by which the fruits are
attributed to a different tree from that, on which they grew."
Id. at
281 U. S.
114-115. The principle of
Lucas v. Earl, that
he who earns income may not avoid taxation through anticipatory
arrangements no matter how clever or subtle, has been repeatedly
invoked by this Court, and stands today as a cornerstone of our
graduated income tax system.
See, e.g., Commissioner v.
Harmon, 323 U. S. 44
(1944);
Page 410 U. S. 451
United States v. Joliet & Chicago R. Co.,
315 U. S. 44
(1942);
Helvering v. Eubank, 311 U.
S. 122 (1940);
Burnet v. Leininger,
285 U. S. 136
(1932). And, of course, that principle applies with equal force in
assessing partnership income.
Permanente's agreement with Kaiser, whereby a portion of the
partnership compensation was deflected to the retirement fund, is
certainly within the ambit of
Lucas v. Earl. The
partnership earned the income and, as a result of arm's-length
bargaining with Kaiser, [
Footnote
9] was responsible for its diversion into the trust fund. The
Court of Appeals found the
Lucas principle inapplicable
because Permanente "never had the right itself to receive the
payments made into the trust as current income." 450 F.2d at 114.
In support of this assertion, the court relied on language in the
agreed statement of facts stipulating that "[t]he payments . . .
were paid solely to fund the retirement plan, and were not
otherwise available to [Permanente]. . . ."
Ibid.
Emphasizing that the fund was created to serve Kaiser's interest in
a stable source of qualified, experienced physicians, [
Footnote 10] the court found that
Permanente could not have received that income except in the form
in which it was received.
The court's reasoning seems to be that, before the partnership
could be found to have received income, there must be proof that
"Permanente agreed to accept less direct compensation from Kaiser
in exchange for the retirement plan payments."
Id. at
114-115. Apart from the inherent difficulty of adducing such
evidence, we know of no authority imposing this burden upon the
Government. Nor do we believe that the guiding principle of
Lucas v. Earl may be so easily circumvented.
Page 410 U. S. 452
Kaiser's motives for making payments are irrelevant to the
determination whether those amounts may fairly be viewed as
compensation for services rendered. [
Footnote 11] Neither does Kaiser's apparent insistence
upon payment to the trust deprive the agreed contributions of their
character as compensation. The Government need not prove that the
taxpayer had complete and unrestricted power to designate the
manner and form in which his income is received. We may assume,
especially in view of the relatively unfavorable tax status of
self-employed persons with respect to the tax treatment of
retirement plans, [
Footnote
12] that many partnerships would eagerly accept conditions
similar to those prescribed by this trust in consideration for tax
deferral benefits of the sort suggested here. We think it clear,
however, that the tax laws permit no such easy road to tax
avoidance or deferment. [
Footnote 13]
Page 410 U. S. 453
Despite the novelty and ingenuity of this arrangement,
Permanente's "base compensation" in the form of payments to a
retirement fund was income to the partnership and should have been
reported as such.
III
Since the retirement fund payments should have been reported as
income to the partnership, along with other income received from
Kaiser, the individual partners should have included their shares
of that income in their individual returns. 26 U.S.C. § §
61(a)(13), 702, 704. For it is axiomatic that each partner must pay
taxes on his distributive share of the partnership's income without
regard to whether that amount is actually distributed to him.
Heiner v. Mellon, 304 U. S. 271
(1938), decided under a predecessor to the current partnership
provisions of the Code, [
Footnote 14] articulates the salient proposition.
Page 410 U. S. 454
After concluding that "distributive" share means the
"proportionate" share as determined by the partnership agreement,
id. at
304 U. S. 280,
the Court stated:
"The tax is thus imposed upon the partner's proportionate share
of the net income of the partnership, and the fact that it may not
be currently distributable, whether by agreement of the parties or
by operation of law, is not material."
Id. at
304 U. S. 281.
Few principles of partnership taxation are more firmly established
than that, no matter the reason for nondistribution, each partner
must pay taxes on his distributive share. Treas.Reg. § 1.702-1, 26
CFR § 1.702-1 (1972). [
Footnote
15]
See, e.g., Hulbert v. Commissioner, 227 F.2d 399
(CA7 1955);
Bell v. Commissioner, 219 F.2d 442 (CA5 1955);
Stewart v. United States, 263 F.
Supp. 451 (SDNY 1967);
Freudmann v. Commissioner, 10
T.C. 775 (1948); S. Surrey & W. Warren, Federal Income Taxation
1115 (1960); 6 J. Mertens, Law of Federal Income Taxation §§ 35.01,
35.22 (1968); A. Willis, On Partnership Taxation § 5.01 (1971).
The courts below reasoned to the contrary, holding that the
partners here were not properly taxable on the amounts contributed
to the retirement fund. This view, apparently, was based on the
assumption that each partner's distributive share prior to
retirement was too contingent
Page 410 U. S. 455
and unascertainable to constitute presently recognizable income.
It is true that no partner knew with certainty exactly how much he
would ultimately receive or whether he would in fact, be entitled
to receive anything. But the existence of conditions upon the
actual receipt by a partner of income fully earned by the
partnership is irrelevant in determining the amount of tax due from
him. The fact that the courts below placed such emphasis on this
factor suggests the basic misapprehension under which they labored
in this case. Rather than being viewed as responsible contributors
to the partnership's total income, respondent partners were seen
only as contingent beneficiaries of the trust. In some measure,
this misplaced focus on the considerations of uncertainty and
forfeitability may be a consequence of the erroneous manner in
which the Commissioner originally assessed the partners'
deficiencies. The Commissioner divided Kaiser's trust fund payments
into two categories: (1) payments earmarked for the tentative
accounts of nonpartner physicians; and (2) those allotted to
partner physicians. The payments to the trust for the former
category of nonpartner physicians were correctly counted as income
to the partners in accord with the distributive share formula as
established in the partnership agreement. [
Footnote 16] The latter payments to the
tentative accounts of the individual partners, however, were
improperly allocated to each partner pursuant to the complex
formula in the retirement plan itself, just as if that agreement
operated as an amendment to the partnership agreement. 295 F. Supp.
at 1292.
Page 410 U. S. 456
The Solicitor General, alluding to this miscomputation during
oral argument, suggested that this error "may be what threw the
court below off the track." [
Footnote 17] It should be clear that the contingent and
unascertainable nature of each partner's share under the retirement
trust is irrelevant to the computation of his distributive share.
The partnership had received as income a definite sum which was not
subject to diminution or forfeiture. Only its ultimate disposition
among the employees and partners remained uncertain. For purposes
of income tax computation, it made no difference that some partners
might have elected not to participate in the retirement program or
that, for any number of reasons, they might not ultimately receive
any of the trust's benefits. Indeed, as the Government suggests,
the result would be quite the same if the "potential beneficiaries
included no partners at all, but were children, relatives, or other
objects of the partnership's largesse." [
Footnote 18] The sole operative consideration is that
the income had been received by the partnership, not what
disposition might have been effected once the funds were
received.
Page 410 U. S. 457
IV
In summary, we find this case controlled by familiar and
long-settled principles of income and partnership taxation. There
being no doubt about the character of the payments as compensation,
or about their actual receipt, the partnership was obligated to
report them as income presently received. Likewise, each partner
was responsible for his distributive share of that income. We
therefore reverse the judgments and remand the case with directions
that judgments be entered for the United States.
It is so ordered.
MR. JUSTICE DOUGLAS dissents.
[
Footnote 1]
Technically, the married respondents' spouses are also parties
because they filed joint income tax returns for the years in
question here. Any reference to respondents in this opinion,
however, refers only to the partner physicians.
[
Footnote 2]
The pertinent portion of the Kaiser-Permanente medical service
contract states:
"
Article H"
"
Base Compensation to Medical Group"
"As base compensation to [Permanente] for Medical Services to be
provided by [Permanente] hereunder, [Kaiser] shall pay to
[Permanente] the amounts specified in this Article H."
"
* * * *"
"
Section H-4. Provision for Savings and Retirement Program
for Physicians."
"In the event that [Permanente] establishes a savings and
retirement plan or other deferred compensation plan approved by
[Kaiser], [Kaiser] will pay, in addition to all other sums payable
by [Kaiser] under this Agreement, the contributions required under
such plan to the extent that such contributions exceed amounts, if
any, contributed by Physicians. . . ."
[
Footnote 3]
The trust agreement states:
"The tentative accounts and suspended tentative accounts
provided for Participants hereunder are solely for the purpose of
facilitating recordkeeping and necessary computations, and confer
no rights in the trust fund upon the individuals for whom they are
established. . . ."
[
Footnote 4]
If, however, termination were occasioned by death or permanent
disability, the trust agreement provided for receipt of such
amounts as had accumulated in that physician's tentative account.
Additionally, if, after his termination for reasons of disability
prior to retirement, a physician should reassociate with some
affiliated medical group, his rights as a participant would not be
forfeited.
[
Footnote 5]
The agreed statement of facts filed by the parties in the
District Court states:
"The primary purpose of the retirement plan was to create an
incentive for physicians to remain with [Permanente] . . . , and
thus to insure [Kaiser] that it would have a stable and reliable
group of physicians providing medical services to its members with
a minimum of turn-over. . . ."
[
Footnote 6]
The Court of Appeals purported not to decide, as the District
Court had, whether the partnership should be viewed as an "entity"
or as a "conduit." 450 F.2d 109, 113 n. 5, and 115. Yet, its
analysis indicates that it found it proper to disregard the
partnership as a separate entity. After explaining its view that
Permanente never had a right to receive the payments, the Court of
Appeals stated:
"When the transaction is viewed in this light, the partnership
becomes a mere
agent contracting on behalf of its members
for payments to the trust for their ultimate benefit, rather than a
principal which itself realizes taxable income."
Id. at 115 (emphasis supplied).
[
Footnote 7]
Each respondent reported his income for the years in question on
the cash basis. The partnership reported its taxable receipts under
the accrual method.
[
Footnote 8]
There has been a great deal of discussion in the briefs and in
the lower court opinions with respect to whether a partnership is
to be viewed as an "entity" or as a "conduit." We find ourselves in
agreement with the Solicitor General's remark during oral argument
when he suggested that "[i]t seems odd that we should still be
discussing such things in 1972." Tr. of Oral Arg. 14. The
legislative history indicates, and the commentators agree, that
partnerships are entities for purposes of calculating and filing
informational returns but that they are conduits through which the
taxpaying obligation passes to the individual partners in accord
with their distributive shares.
See, e.g., H.R.Rep. No.
1337, 83d Cong., 2d Sess., 65-66 (1954); S.Rep. No. 1622, 83d
Cong., 2d Sess., 89-90 (1954); 6 J. Mertens, Law of Federal Income
Taxation § 35.01 (1968); S. Surrey & W. Warren, Federal Income
Taxation 1115-1116 (1960); Jackson, Johnson, Surrey, Tenen &
Warren, The Internal Revenue Code of 1954: Partnerships, 54
Col.L.Rev. 1183 (1954).
[
Footnote 9]
The agreed statement of facts states that the contracting
parties were "separate organizations independently contracting with
one another at arms' length."
[
Footnote 10]
See n 5,
supra.
[
Footnote 11]
Respondents do not contend that such payments were gifts or some
other type of nontaxable contribution.
See Commissioner v.
LoBue, 351 U. S. 243
(1956);
Bingler v. Johnson, 394 U.
S. 741 (1969).
[
Footnote 12]
Disparities have long existed between the tax treatment of
pension plans for corporate employees and the treatment of similar
plans for the self-employed and for members of partnerships. S.
Surrey & W. Warren,
supra, n 8, at 598-599. In 1962, Congress endeavored to
ameliorate these differences by enacting corrective legislation,
Pub.L. 87-792, 76 Stat. 809. While that legislation, commonly known
as H.R. 10 or the Jenkins-Keogh Bill, provided some relief, it fell
far short of affording a parity of treatment for professionals and
other self-employed individuals. Internal Revenue Code of 1954, §
404. For a detailed review of the intricate provisions of the
applicable statute and for a close comparison of the present
differences,
see Grayck, Tax Qualified Retirement Plans
for Professional Practitioners: A Comparison of the Self-Employed
Individuals Tax Requirement Act of 1962 and the Professional
Association, 63 Col.L.Rev. 415 (1963); Note, Federal Tax Policy and
Retirement Benefits -- A New Approach, 59 Geo.L.J. 1299 (1971);
Note, Tax Parity for Self-Employed Retirement Plans, 58 Va.L.Rev.
338 (1972).
[
Footnote 13]
Respondents contend in this Court that this case is controlled
by
Commissioner v. First Security Bank of Utah,
405 U. S. 394
(1972), decided last Term. We held there that the Commissioner
could not properly allocate income to one of a controlled group of
corporations under 26 U.S.C. § 482 where that corporation could not
have received that income as a matter of law. The "assignment of
income doctrine" could have no application in that peculiar
circumstance because the taxpayer had no legal right to receive the
income in question.
Id. at
405 U. S.
403-404. In essence, that case involved a deflection of
income imposed by law, not an assignment arrived at by the
consensual agreement of two parties acting at arm's length as we
have in the present case.
See n 5,
supra.
[
Footnote 14]
Revenue Act of 1918, § 218(a), 40 Stat. 1070:
"There shall be included in computing the net income of each
partner his distributive share, whether distributed or not, of the
net income of the partnership for the taxable year. . . ."
Other predecessor statutes contained similar explicit
indications that a partner's distributive share was to be computed
without reference to actual distribution.
See Income Tax
Act of 1913, § II D, 38 Stat. 169 ("whether divided or otherwise");
Revenue Act of 1938, § 182, 52 Stat. 521 ("whether or not
distribution is made to him"). Nothing in the legislative history
suggests that any substantive change was intended by the deletion
of this phrase from the 1954 Code revisions.
See H.R.Rep.
No. 1337, 83d Cong., 2d Sess., 65 (1954); S.Rep. No. 1622, 83d
Cong., 2d Sess., 89 (1954).
[
Footnote 15]
The regulation states as follows:
"Each partner is required to take into account separately in his
return his distributive share, whether or not distributed, of each
class or item of partnership income. . . ."
[
Footnote 16]
These amounts would be divided equally among the partners
pursuant to the partnership agreement's stipulation that all income
above each partner's drawing account "shall be distributed
equally."
[
Footnote 17]
Tr. of Oral Arg. 13-14. As the Solicitor General has also
pointed out, the parties have, by stipulation in their agreed
statement of facts, foreseen that recomputations might be necessary
in light of the ultimate resolution of this controversy, and have
taken precautions to assure that any necessary reallocations may be
handled expeditiously. Agreed Statement of Facts � 24, App.
87-88.
[
Footnote 18]
Brief for United States 21. For this reason, the cases relied on
by the Court of Appeals, 450 F.2d at 113, which have held that
payments made into deferred compensation programs having contingent
and forfeitable features are not taxable until received, are
inapposite.
Schaefer v. Bowers, 50 F.2d 689 (CA2 1931);
Perkins v. Commissioner, 8 T.C. 1051 (1947);
Robertson
v. Commissioner, 6 T.C. 1060 (1946). Indeed, the Government
notes, possibly as a consequence of these cases, that the
Commissioner has not sought to tax the nonpartner physicians on
their contingent accounts under the retirement plan. Brief for
United States 21.