United States v. Kintner

• Decision Date: 14 October 1954
• Docket Number: No. 13731.,13731.
• Citation: 216 F.2d 418
• Parties: UNITED STATES of America, Appellant, v. Arthur R. KINTNER and Alyce Kintner, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

216 F.2d 418 (1954)

UNITED STATES of America, Appellant, v. Arthur R. KINTNER and Alyce Kintner, Appellees.

No. 13731.

United States Court of Appeals Ninth Circuit.

October 14, 1954.

H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Harry Baum and Melva M. Graney, Sp. Assts. to the Atty. Gen., Dalton Pierson, U. S. Atty., R. Lewis Brown, Jr., Asst., Butte, Montana, for appellant.

Russell E. Smith, W. T. Boone, Jack W. Rimel, Missoula, Mont., for appellee.

Before ORR and CHAMBERS, Circuit Judges, and YANKWICH, District Judge.

YANKWICH, District Judge.

This is an appeal from the Judgment of the District Court of Montana, 107 F. Supp. 976, in favor of the appellees, who were the plaintiffs below, in an action to recover amounts paid as deficiency assessments on their income tax for the year 1948. The amount involved is rather small, — $780.13 plus interest. But the questions involved are of great importance. The plaintiffs are husband and wife, the wife being made a party because joint returns were filed. We shall refer to the husband as "the taxpayer".

The taxpayer is a doctor of medicine practicing his profession in Missoula, Montana. For many years prior to June 30, 1948, he was a member of a co-partnership which practiced medicine under the firm name of Western Montana Clinic. On that day the partners dissolved the partnership and executed "Articles of Association" whereby they sought to become members of an unincorporated association to be known as the "Association" for the practice of medicine under the prior name. The assets and liabilities of the partnership were taken over by the Association which continued to carry on its activities. All but two of the employees of the partnership became employees of the Association.

The Articles of Association provided that the members "associate themselves together for the practice of medicine and surgery as an unincorporated association", which was to be endowed with the "attributes of a corporation" and to be "treated as a corporation for the purposes of taxation". The Association was to terminate upon the death of the last survivor of the original members. The original "members" of the Association were the eight doctors who had been the members of the partnership, and only physicians or surgeons duly licensed to practice medicine in Montana were eligible for admission to membership. The business of the Association was to be managed by an Executive Committee composed of five of the members who were to select the officers. Any indebtedness incurred by the Association through the act of a member without authority conferred by the Committee was chargeable against such member's share of the earnings of the Association. Only the members were to be liable to third parties for professional misconduct. They were to receive "salaries fixed by the Executive Committee. The net earnings of the Association were to be divided among them "in proportion to the salaries of such members", and "all sums paid to members * * * by way of distribution of net earnings shall be deemed to constitute compensation to the Members for services rendered during the year."

The Association was to collect "the accounts receivable for professional services rendered" by the members, was to furnish them with the equipment needed to render such services, and was to pay "all necessary expenses incident to the practice of medicine and surgery by its Members". Instead of receiving an interest in the assets of the Association, each member agreed that upon his death or withdrawal, he would accept the benefits of a pension plan, the cost of which was to be borne by the Association. The death or retirement of a member was not to result in a dissolution of the Association, and the interest of a member was "non-assignable".

The Association enabled some rather than all the former partners to manage its affairs. The new form avoided the necessity of reorganization upon the death of a member. Since its formation the Association has operated in accordance with the Articles of Association. Its affairs have been managed by an Executive Committee composed of some of the members and officers chosen by the Committee have handled other details of management. The taxpayer was elected its president. The Association rented space for use in the practice of medicine; employed the services of nonmember doctors and other employees; collected the fees earned for medical services rendered by its members and other doctors employed by it; and paid them salaries and expenses incurred in practicing their profession. It also paid social security and withholding taxes, for which purposes it included among its employees the member-doctors; and it paid federal incorporate income taxes and state corporation license taxes.

The Articles of Association provided for the establishment of a pension plan for the benefit of "qualified employees", whereby those who had been employed by the Association or the partnership for at least three years and had attained the age of at least thirty years, became entitled to retirement benefits. Upon its formation, the Association entered into a pension trust agreement with a trustee-bank. This agreement provided, with respect to eligibility requirements, that employees of the Association who were "employees or members" of the predecessor partnership "shall be given credit for such period of membership or employment by such predecessor". All contributions under the pension plan are made by the Association and not by the participants.

During the portion of the tax year 1948, beginning on July 1, 1948, the Association had thirty-eight employees, including as "employees" the eight member-doctors who were the members of the partnership. Of these, twenty-four (not including the member-doctors) were ineligible to participate under the terms of the pension plan because they had been employed less than three years, and three others were ineligible because of the age requirements. Of the remaining eleven persons who participated in the plan, eight were the member-doctors. For the purpose of determining whether they had been employed by the Association for at least three years, the period during which they had been members of the partnership was treated as a period of employment. Only three persons who were not members of the Association participated in the plan.

The Association set up a "reserve" fund on its books during 1948 to cover anticipated operating expenses for future years. If the Association is to be regarded for federal income-tax purposes as a partnership rather than a corporation, a share of this reserve amounting to $1,140.82 is includible in taxpayer's income for the tax year 1948.

The Association also made contributions to the pension trust during 1948, of which $976.14 was paid for the taxpayer's benefit. The taxpayer did not report either of these amounts in his 1948 tax returns. The Commissioner added them to his income and made a deficiency determination. The taxpayer paid the deficiency, and after his claim for refund was not acted upon within the period required by law, he instituted this action for refund. Internal Revenue Code, 26 U.S.C. § 3772(a).

The District Court found that the Association was to be treated as a corporation rather than a partnership, and that the taxpayer's share of the reserve fund set aside by the Association was not taxable to him. It also held that the trust met the exemption requirements of Section 165(a) of the Internal Revenue Code, 26 U.S.C. § 165(a), and that the amount paid to the trust by the Association was not taxable to him. Judgment for refund was entered on October 9, 1952, in favor of the taxpayer. The Government appeals.

I Association or Partnership?

The first question to determine is whether the Association is to be treated as a corporation for tax purposes. The trial court so held in full Findings. Its opinion is reported in Kintner v. United States, D.C.Mont., 1952, 107 F.Supp. 976. Reliance was placed on Morrissey v. Commissioner, 1935, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263, in making this determination. The Court was especially impressed by what it called "Criterion No. 3, termination or interruption by the death or withdrawal of owners". 107 F.Supp. at pages 979-980.

It is the Government's contention that the decision is erroneous in that the practice of medicine is personal, and that a corporation cannot engage in such practice. As a general rule, a corporation cannot practice medicine. 41 Am.Jur., Physicians and Surgeons, Sec. 20; People by Kerner v. United Medical Services, 1936, 362 Ill. 442, 200 N.E. 157, 103 A.L. R. 1229; State ex rel. Beck v. Goldman Jewelry Co., 1935, 142 Kan. 881, 51 P.2d 995, 102 A.L.R. 334.

The laws of Montana do not include the practice of medicine as one of the purposes for which a corporation may be organized. Montana Civil Code, 1935, Sec. 5902. And it may be assumed that its courts would infer from this statute an intention to prohibit a corporation from practicing medicine. The Government relies on the decision of the Court of Appeals for the Fifth Circuit in Mobile Bar Pilots' Association v. Commissioner, 5 Cir., 1938, 97 F.2d 695. The Court there held that because of the personal nature of a pilot's services, an association of pilots could not be classified as a corporation. There is a decision of the Court of Appeals for the Seventh Circuit holding that a clinic organized for the practice of medicine was an "association" and taxable as such despite the fact that the state in which it was organized (Illinois) did not permit a corporation to practice medicine: Pelton v. Commissioner, 7 Cir., 1936, 82 F.2d 473. There the Commissioner was making contentions contrary to those which he is making here. The two-fold answer which the Court gave to the contentions of the taxpayer there is worth reproducing. The Court said:

"It is obvious from this record that petitioners\' enterprise was

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