Rev. Rul. 77-420

Advice has been requested whether amounts withheld by a nonprofit corporation under a deferred payment agreement described in Rev. Rul. 69-50, 1969-1 C.B. 140, are includible in a participating physician's gross income for the year in which they are withheld, if the agreement contains a substantial forfeiture provision inuring to the corporation.

In Rev. Rul. 69-50, a participating physician voluntarily entered into an agreement with a nonprofit corporation that insures medical expenses of its subscribers. Under the agreement, the physician irrevocably elected to defer a percentage of payments that were otherwise due the physician from the corporation for services rendered to patients insured by the corporation. The amounts deferred are paid to the physician in equal monthly installments upon the earlier of retirement or disability, or, in the case of death, to the physician's beneficiary.

Rev. Rul. 69-50 holds that the physician must include the deferred amounts in gross income for the year in which they are withheld by the corporation, because the physician's right to the compensation payments emanates from the medical services that are rendered to the patients insured by the corporation. The patients compensate the physician for the services by investing the physician with the right to compensation payments from the corporation. In effect the patients have funded their obligation to the physician with the corporation, thereby conferring an economic or financial benefit on the physician.

The conclusion of Rev. Rul. 69-50 is based on the fact that the physician's income arises out of the physician's acquisition from the patient of a right to payment from the corporation. Because the agreement between the corporation and the physician is independent of the dealings between the patient and the physician, the inclusion of a substantial forfeiture provision in the agreement does not alter the relationship by which the patient-subscriber has conferred an economic or financial benefit on the physician. Although the forfeiture provisions could cause the physician to forfeit amounts to the corporation, under no circumstances would the physician forfeit any amount to any patient.

Accordingly, the deferred amounts withheld by the corporation under the agreement are includible in the physician's gross income for the year in which they are withheld, even if the agreement contains a substantial forfeiture provision.

This conclusion is not inconsistent with that of Rev. Rul. 69-474, 1969-2 C.B. 105, which holds that a partnership composed of physicians that, pursuant to an agreement, furnishes medical services to a nonprofit medical and hospital service corporation does not derive any gross income by reason of any interest in or right under the corporation's retirement plan provided for the physicians. In Rev. Rul. 69-474, the corporation was contractually obligated to furnish medical services to its members, the partnership entered into an employment relationship directly with the corporation to provide the services, and the compensation received by the partnership from the corporation was not related to any particular services provided to any specific patients or based on any particular type of service or contractual relationship existing between the patients and the partnership.

Rev. Rul. 69-50 is amplified.