UNITED STATES V. BASYE
| Decision Date | 27 February 1973 |
| Citation | 410 U. S. 441 |
| Court | U.S. Supreme Court |
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
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. P P. 448-457.
450 F.2d 109, reversed and remanded.
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.
Respondents, each of whom is a physician, [Footnote 1] are partners in a limited partnership known as Permanente
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 .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
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 0,000 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
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
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 ,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
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...
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