United States v. Basye case brief

UNITED STATES V. BASYE
410 U.S. 441 (1973)

PROCEDURAL POSTURE: Petitioner United States sought review of a decision of U.S. Court of Appeals for the Ninth Circuit holding that respondents, physicians, and partners in a medical partnership, were entitled to a refund of income taxes previously paid pursuant to a deficiencies assessed by the Commissioner of the Internal Revenue.
-The deficiencies were assessed on income derived from the partnership's retirement fund income.

FACTS:
-Permanente Group was an organization of physicians in partnership.
-In 1959, Permanent entered into an agreement with Kaiser, a nonprofit corporation providing prepaid medical care and hospital services to its dues-paying members.
-Perrmanente agreed to supply medical services for the 390,000 member families in Kaiser's Northern California Region.
-Kaiser agreed to pay the partnership a base compensation composing two elements.
-Kaiser agreed to pay directly to the partnership a sum each month computed on the basis of the total number of members enrolled in the program.
-The second compensation called for the creation of a program funded by Kaiser to pay retirement benefits to Permanente's partner and non-partner physicians.
-The agreement simply obligated Kaiser to make contributions to the retirement program in the event that the parties might thereafter agree to adopt one.
-A separate trust agreement for the plan was soon created with B of A acting as trustee.
-Kaiser agreed to pay 12 cents per health plan member per month.
-The beneficiaries were the partner and non-partner physicians who had completed at least two years of continuous service and who elected to participate.
-Funds were allocated pursuant to a formula designed to take into consideration on a relative basis each participant's compensation level, length of service and age.
-Prior to "retirement" no interest in any tentative account was to be regarded as having vested in any particular beneficiary and forfeiture was the penalty if the physician terminated his relationship prior to retirement.
-A non-complete forfeiture clause was also in effect after retirement as well as for a refusal to perform any reasonable request to render consultative services to any Kaiser operated health plan. -Under no circumstances could payments by Kaiser to the plan be recouped once compensation had been paid.
-The 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.
-From inception until 1963, Kaiser paid more than $2,000,000 into the plan.
-Permanente did not report those payments as income in its partnership returns nor did individual partners report their share as taxable income.
-The Commissioner assessed deficiencies and defendants paid the assessments and filed suit for refund.

ISSUE:
-Once a partnership receives as income a definite sum of money, which was not subject to diminution or forfeiture, must those monies be allocated to the partners for tax purposes?

RULES:
-Once a partnership receives as income a definite sum of money which was not subject to diminution or forfeiture, those monies must be allocated to the partners for
tax purposes.
-Before a partnership can be found to receive income related to a retirement plan, there need be no proof that the partnership agreed to accept less direct compensation in exchange for the retirement plan.
-Taxation cannot be avoided by entering into anticipatory assignments of income.

ANALYSIS:
-After discontinuance of respondent medical partnership's retirement plan, respondent partners were assessed tax deficiencies by petitioner United States for income distributed from plan.
-The petitioner contended that payments made to respondent partnership deflected to a retirement plan were actually compensation to the partnership and should have been reported as income when received.
-The U.S. Supreme Court found that the agreement from which such payments derived called for two types of base compensation to be paid in exchange for services provided by respondents.
-Such compensation included direct payments to the partnership and payments to be deflected to a retirement fund to induce the partners to remain with the partnership and thus insure the continuity and quality of services provided by respondents.
-Payments to the trust were not forfeitable by the partnership or recoverable by an entity making such payments.
-Thus, payments deflected to a retirement fund were income to the partnership and should have been reported as such, and the individual partners should have included their shares of that income in their individual returns. 

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