Rev. Rul. 66-377

Advice has been requested with respect to the treatment, for Federal income tax purposes, of fees received from private professional practice by faculty members of a university's school and turned over to the school under the circumstances described below.

A university operates two basic plans for compensating the faculty members holding full-time appointments in its school of medicine. Plan `A' covers faculty members who are expected to receive their entire prefessional income in the form of a salary from the university. Each faculty member enrolled under this plan is required to turn over promptly to the medical school his income from outside professional activities, other than royalties from books, prizes and honoraria for lectureships, and amounts received for services on advisory grant committees. Plan `B' covers faculty members who are permitted to supplement the salary they receive from the university by income from private professional practice (exclusive of royalties from books, prizes and honoraria for lectureships, and amounts received for services on advisory grant committees) up to an amount which in any calendar year, before income taxes, equals their salary plus legitimate professional expenses for such year. Any income from professional practice in excess of such an amount must be turned over promptly to the mdeical school of the university. The surrendering of the fees by the faculty members, enrolled in either plan, is made pursuant to the terms of their employment contracts with the university.

The specific question presented is whether the fees received by the faculty members and turned over promptly to the school are includible in the gross income of the faculty members or are excludable therefrom on the ground that the faculty members are acting as agents for the school.

Section 61(a) of the Internal Revenue Code of 1954 defines gross income as all income, from whatever source derived, except as otherwise provided by law. It specifically includes compensation for services, including fees and similar items.

Under the terms of the employment contract the faculty members are permitted to engage in outside professional activities. The single limiting restriction is that all or a portion of the faculty members' fees must, as a condition of their continued employment by the school, be turned over promptly to the school. The faculty members are not agents of the school when they engage in outside professional activities.

Accordingly, the fees received by the faculty members who engage in private practice must be included in gross income even though the faculty members are required by their employment contracts with the university to turn all or a part of such fees over to the medical school.

That amount of the fees received by the faculty members from their private practices which actually is turned over to the medical school, under the circumstances, is deductible as an ordinary and necessary business expense under the provisions of section 162(a) of the Code.

Under similar provisions of prior law, O.D. 1009, C.B. 5, 81 (1921), held that where an officer of a bank agreed to turn over to the bank fees earned as a receiver and trustee, he was required to report such fees in his gross income and then deduct them as business expense. Since that conclusion is equally applicable under the current law, it is incorporated herein and O.D. 1009 is superseded.