Document: 35 L.Ed.2d 412 93 S.Ct. 1080 410 U.S. 441 UNITED STATES, Petitioner,v.James A. BASYE et al. No. 71—1022. Argued Dec. 11, 1972. Decided Feb. 27, 1973. Rehearing Denied Apr. 16, See 411 940, 1888. Syllabus A medical partnership (Permanente), in which respondent physicians were partners, made an agreement to supply services members of a health foundation (Kaiser). portion Kaiser's compensation Permanente was the form payments into retirement trust for benefit Permanente's physicians, none whom eligible receive amounts his tentative account prior after specified years service. No interest deemed vest particular beneficiary before retirement, and physician's preretirement severance from would occasion forfeiture interest, with redistribution remaining participants. Under no circumstances, however, could Kaiser recoup once made. The Commissioner Internal Revenue assessed deficiency against each partner-respondent distributive share amount paid by Kaiser, he had not reported as taxable income. In this refund suit District Court, Court Appeals affirming, held that fund income because it did 'right receive' them. Held: notwithstanding fact they contributed directly trust, rendered under medical-service should have been Permanente; individual partners included their shares returns, since existence conditions upon actual receipt partner fully earned is relevant factor determining its taxability him. Pp. 448—457. 9 Cir., 450 F.2d 109, reversed remanded. Solicitor General Erwin N. Griswold petitioner. Valentine Brookes, San Francisco, Cal., respondents. Mr. Justice POWELL delivered opinion Court. 1 This tax case brought here United States on petition writ certiorari Ninth Circuit. Respondents, partnership, filed Northern California seeking taxes previously pursuant Revenue. heard agreed statement facts ruled respondents' favor. 295 F.Supp. 1289 (1968). Government appealed Circuit court affirmed lower court's judgment. 109 (1971). We hear consider whether, contends, decision below conflict precedents 405 1039, 92 1315, 31 579 (1972). Because we find incompatible basic principles taxation developed our cases, reverse. 2 * physician,1 are limited known Medical Group, organized 1949. Associated over 200 well numerous nonpartner other employees. 1959, entered Foundation Health Plan, Inc., nonprofit corporation providing prepaid care hospital dues-paying members. 3 Pursuant terms agreement, 390,000 member-families, or about 900,000 individuals, Region covers primarily Francisco Bay area. exchange those services, pay 'base compensation' composed two elements. First, undertook sum month computed basis total number enrolled program. That multiplied stated fee, originally set at little $2.60. second item compensation—and one has occasioned present dispute called creation program, funded entirely benefits non-partner physicians. 4 pertinent provision itself establish details program; simply obligated make contributions such program event parties might thereafter agree adopt one.2 As be expected, separate establishing contemplated plan soon executed Permanente, Bank America Trust Savings Association, acting trustee. predetermined rate, initially pegged 12 cents per member month. Additionally, flat payment $200,000 start pro rata obligation retroactive date signing service agreement. 5 beneficiaries all who completed least continuous elected participate. maintained beneficiary. periodic received funds allocated among these accounts complicated formula designed take consideration relative participant's level, length service, age. physician established entitlement only if participant 15 10 attained age 65. Prior time, explicitly provided any regarded having vested beneficiary.3 also participants terminate relationship retirement.4 similar occur if, render professional than operated Kaiser. further stipulated retired right cease refuse reasonable request consultative Kaiser-operated plan. 6 continue irrespective either changes partnership's personnel alterations organizational structure. survive reorganization so long 50% plan's remained associated reorganized entity. dissolution nonqualifying reorganization, divided entitled thereto governed account. recouped Kaiser: committed exclusively participating 7 Upon physician, satisfied requirements participation, accumulated applied purchase contract. While thus obvious served interests. By attractive deferred staff professionals, 'create incentive' remain 'insure' 'stable reliable group physicians.'5 8 During inception until discontinuance 1963, more $2,000,000 trust. report returns. Nor include computations deficiencies paying assessments protest, consolidated suits refund. premised assessment conclusion constituted therefore partnership. And, deflection current unavailability still compensation. Both disagreed. They pertnership them never F.Supp., 1292—1294; F.2d, 114—115. reasoned entity, disregarded treated potential fund.6 Viewed light, presently attributed cash basis7 taxpayers contingent forfeitable nature allocations. 1294—1296; 112. hold courts erred respondents properly rests familiar taxation, first, taxed party earns liability may avoided through anticipatory assignment income, and, second, proportionate whether actually distributed ensuing discussion application case. II 11 Section 703 Code 1954, insofar here, prescribes '(t)he shall same manner individual.' 26 U.S.C. § 703(a). Thus, while pays taxes, 701, must generates calculated largely computes personal For purpose, then, independently recognizable entity apart aggregate partners. Once ascertained reported, merely agent conduit passed.8 partner's first necessary compute gross One major sources defined 61(a)(1) Code, '(c)ompensation including fees, commissions, items.' 61(a)(1). There can question These integral part employment arrangement. forms rendered—direct per-member, per-month other, similarly computed, condition continuation contractual performance prescribed services. Payments much like direct recoverable happening contingency. 13 Yet below, focusing but found includable view accountability foundational rule, described 'the principle taxation: him it.' v. Culbertson, 337 733, 739—740, 69 1210, 1213, L.Ed. 1659 (1949). earning taxpayer—cannot avoid entering arrangement whereby diverted some person Such arrangements, law 'anticipatory assignments income,' frequently ineffective means avoiding liability. seminal precedent, written 40 ago, Holmes' unanimous Lucas Earl, 281 111, 50 241, 74 731 (1930). taxpayer contract wife she became one-half earn future. On belief accountable him, husband half unwilling accept construction laws permitted easy liability, responsible entire 14 Court's ruling explicit controls us today: '(T)his decided attenuated subtleties. It turns import taxing act. doubt statute salaries provide escaped arrangements contracts however skilfully devised prevent salary when vesting even man it. seems think distinction taken according motives leading fruits different tree grew.' Id., 114—115, 241. 16 matter how clever subtle, repeatedly invoked stands today cornerstone graduated system. See, e.g., Harmon, 323 44, 65 103, 89 60 (1944); Joliet & Chicago R. Co., 315 62 442, 86 658 (1942); Helvering Eubank, 311 122, 61 149, 85 81 (1940); Burnet Leininger, 285 136, 52 345, 76 665 (1932). course, applies equal force assessing 17 deflected fund, certainly within ambit Earl. result arm's bargaining Kaiser,9 diversion fund. inapplicable 'never income.' 420 114. support assertion, relied language stipulating . solely plan, otherwise available (Permanente) ..' Ibid. Emphasizing created serve stable source qualified, experienced physicians,10 except received. 18 reasoning that, there proof 'Permanente less payments.' Apart inherent difficulty adducing evidence, know authority imposing burden Government. do believe guiding Earl easily circumvented. making irrelevant determination fairly viewed rendered.11 Neither does apparent insistence deprive character need prove complete unrestricted power designate assume, especially relatively unfavorable status self-employed persons respect treatment plans,12 many partnerships eagerly tax-deferral sort suggested here. clear, permit road avoidance deferment.13 Despite novelty ingenuity arrangement, such. III 19 Since along §§ 61(a)(13), 702, 704. axiomatic without regard Heiner Mellon, 304 271, 58 926, 82 1337 (1938), predecessor provisions Code,14 articulates salient proposition. After concluding 'distributive' 'proportionate' determined id., 280, 931, stated: 20 'The imposed net currently distributable, operation law, material,' 281, S.Ct., 931. 21 Few firmly reason nondistribution share. Treas.Reg. 1.702—1, CFR 1.702—1 (1972).15 Hulbert Revenue, 227 399 (CA7 1955); Bell 219 442 (CA5 Stewart States, 263 451 (SDNY 1967); Freudmann T.C. 775 (1948); S. Surrey W. Warren, Federal Income Taxation 1115 (1960); J. Mertens, Law 35.01, 35.22 (1968); Willis, Partnership 5.01 22 contrary, holding view, apparently, based assumption too unascertainable constitute true knew certainty exactly ultimately anything. But due placed emphasis suggests misapprehension labored Rather being contributors respondent-partners seen measure, misplaced focus considerations uncertainty forfeitability consequence erroneous partners' deficiencies. categories: (1) earmarked physicians; (2) allotted purtner former category correctly counted accord distributive-share agreement.16 latter improperly complex itself, just amendment 1292. 23 General, alluding miscomputation during oral argument, error 'may what threw off track.'17 clear computation definite subject diminution forfeiture. Only ultimate disposition employees uncertain. purposes difference participate reasons, trust's benefits. Indeed, suggests, quite 'potential all, children, relatives, objects largesse.'18 sole operative effected IV 24 summary, controlled long-settled taxation. compensation, receipt, Likewise, We, therefore, reverse judgment remand directions States. 25 ordered. Judgment remanded directions. 27 DOUGLAS dissents. Technically, married spouses joint returns Any reference opinion, refers partner-physicians. Kaiser-Permanente states: 'Article H 'Base Compensation Group 'As base Services hereunder, (Kaiser) Article H. 'Section H—4. Provision Retirement Program Physicians. 'In establishes savings approved (Kaiser), will pay, addition sums payable Agreement, required extent exceed amounts, any, Physicians suspended Participants hereunder purpose facilitating record keeping computations, confer rights individuals established. .' If, termination death permanent disability, reasons disability reassociate affiliated forfeited. primary create incentive insure minimum turn-over. purported decide, had, 'entity' 'conduit.' 113 n. 5, 115. Yet, analysis indicates proper disregard explaining payments, 'When transaction becomes mere contracting behalf benefit, rather principal realizes 115 (emphasis supplied). Each basis. receipts accrual method. great deal briefs opinions ourselves General's remark argument '(i)t odd discussing things 1972.' Tr. Oral Arg. 14. legislative history indicates, commentators agree, entities calculating filing informational conduits taxpaying passes shares. H.R.Rep.No.1337, 83d Cong., 2d Sess., 65—66 (1954); S.Rep.No.1622, 89—90 (1954), U.S.Code Cong. Admin.News p. 4017; 35.01 1116 Jackson, Johnson, Surrey, Tenen 1954: Partnerships, 54 Col.L.Rev. 1183 (1954). states 'separate organizations another arms' length.' supra. Respondents contend gifts type nontaxable contribution. LoBue, 351 243, 800, 100 1142 (1956); Bingler 394 741, 1439, 695 (1969). Disparities existed between pension plans corporate partnerships. supra, 8, 598—599. 1962, Congress endeavored ameliorate differences enacting corrective legislation, Pul.L. 87—792, Stat. 809. commonly H.R.10 Jenkins-Keogh Bill, relief, fell far short affording parity professionals individuals. 404. detailed review intricate applicable close comparison differences, see Grayck, Tax Qualified Plans Professional Practitioners: Comparison Self-Employed Individuals Requirement Act 1962 63 415 (1963); Note, Policy Benefits—A New Approach, 59 Geo.L.J. 1299 (1971); Parity Plans, Va.L.Rev. 338 First Security Utah, 394, 1085, 318 (1972), last Term. allocate corporations 482 where law. 'assignment-of-income doctrine' peculiar circumstance legal question. 403—404, 1091 1092. essence, involved arrived consensual 1918, 218(a), 1070: 'There computing share, not, year Other statutes contained indications distribution. 1913 D, 38 169 ('whether otherwise'); 1938, 182, 521 distribution him'). Nothing substantive change intended deletion phrase 1954 revisions. regulation follows: 'Each separately return distributed, class equally agreement's stipulation above drawing 'shall equally.' 13—14. pointed out, have, facts, foreseen recomputations light resolution controversy precautions assure reallocations handled expeditiously. Agreed Statement Facts 24, App. 87—88. Brief 21. reason, cases Appeals, 113, programs features received, inapposite. Schaefer Bowers, 689 (C.A.2 1931); Perkins Commissioner, 1051 (1947); Robertson 1060 (1946). notes, possibly sought

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