Rev. Rul. 70-435

Further consideration has been given to example (5) of Revenue Ruling 60-31, C.B. 1960-1, 174, in light of the case of Ray S. Robinson v. Commissioner, 44 T.C. 20 (1965), acquiescence in this issue, page xxi, this bulletin. That Revenue Ruling, in general, deals with the application of the doctrine of constructive receipt with respect to various arrangements purporting to provide for the payment of deferred compensation in the case of taxpayers who use the cash receipts and disbursements method of accounting. The result reached in example (5) was adverse to the taxpayer and was premised on a finding that the enterprise giving rise to the income in question was a joint venture. The conclusion that the arrangement described in example (5) of Revenue Ruling 60-31 was a joint venture is contrary to the finding reached on similar facts by the Tax Court in the Robinson case.

The Internal Revenue Service agrees that the facts stated in example (5) of Revenue Ruling 60-31 do not support a finding that the arrangement described is a joint venture. Accordingly, example (5) and the conclusion paragraph relating to it are modified to read as follows:

(5) The taxpayer, a theatrical performer, enters into an agreement with a producer whereby the taxpayer and the producer agree to share the profits and losses from the production of a play. Under the agreement the producer is to furnish the cash necessary to produce the play and will assume the usual duties and obligations of a producer. The taxpayer will play the leading role in the production and will also direct the play. In addition, the taxpayer is responsible for supervising various aspects of the production itself, including the hiring of other performers and the designing of scenery. The agreement further provides that no more than 25 percent of the taxpayer's share of the net profits from the play are to be paid to him annually during the run of the play. The net profits accumulated for the taxpayer are to be paid him in equal amounts annually for a period of four years commencing with the closing of the play. Provision is also made for the actor to obtain periodic financial statements as to the income and expenditures relating to the production of the play.

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(5) In this case the individual performer and the producer are each acting in his own right; the proposed production of the play is a joint venture considered a partnership under section 761(a) of the Code and the taxpayer is neither an employee nor an independent contractor as to the producer. This joint venture is required to file a return for each taxable year under section 6031 of the Code, computing the taxable income of the partnership under section 703 and the regulations thereunder. Pursuant to sections 702 and 706 of the Code and the regulations thereunder, each partner is required, in determining his own income tax to take into account his distributive share (whether or not distributed) of each class or item of partnership income, gain, loss, deduction or credit, determined under the provisions of the partnership agreement pursuant to section 704, for each partnership year ending within or with his own taxable year. The effect of this is that the performer taxpayer's distributive share of the net profits from the play is includible in his taxable income in his first taxable year ending with or after the first taxable year of the partnership, although the joint venture retains physical possession thereof by virtue of the arrangement with the taxpayer who, in substance, has thus authorized it to take possession and hold such net profits for him for distribution at a later time. Thereafter, the taxpayer's proportionate share of the net profits for each taxable year of the joint venture is includible in his gross income for each taxable year of his which ends with or after the taxable year of the joint venture.

Revenue Ruling 60-31 is hereby modified.