Nature of the Case
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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. Permanente 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 nonpartner 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 nonpartner 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-compete 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 ensure 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 Ds paid the assessments and filed suit for refund. Both the District Court and the Court of Appeals disagreed with the Commissioner. They held that the payments were not income as they were never received and the parties never had a right to them. They reasoned that the partnership as an entity should be disregarded and each partner should be treated as a potential beneficiary and thus no income was attributable because of the contingent and forfeitable nature of the funds allocated.
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