Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 54-68

1954-1 C.B. 151

Sec. 702

Sec. 7701

IRS Headnote

An arrangement wherein the members of the medical staff of a hospital agree to pool certain fees constitutes a partnership for Federal tax purposes, and each member is taxable upon his distributive share of the net earnings thereof, whether or not distributed.

Full Text

Rev. Rul. 54-68

Advice is requested regarding the Federal income tax consequences of an agreement entered into by all member physicians of the medical staff of a hospital to pool certain fees.

Under the terms of the agreement entered into by all members of the hospital staff, the fees received by each individual physician on account of services rendered ward patients are turned over to a medical service fund. It appears that some ward patients are able to pay for their medical care but others are not. The purpose of the arrangement is to make sure that each member of the staff receives an equitable share of the fees paid by ward patients. Distributions are made out of the fund to the member physicians in proportion to the duration of their membership on the staff during the period of accumulation. By the end of each calendar year substantially all the fees received during such year are distributed, but certain small amounts are retained as reserves for administration expenses of the fund.

Section 3797(a)(2) of the Internal Revenue Code states that `The term `partnership' includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which it not, within the meaning of this title, a trust or estate or a corporation.' The term `partner' is defined as a member of such syndicate, group, pool, joint venture, or other unincorporated organization.

It is held that the instant arrangement constitutes a partnership within the meaning of section 3797(a)(2) of the Internal Revenue Code, and that the members of the hospital staff are the partners thereof. The organization must file a partnership return, Form 1065, for each taxable year reporting therein, among other things, the total amount of fees received for such taxable year, the names of the individuals who would be entitled to share in its net income if distributed and the amount of the distributive share of each individual. It is further held that each member must report as taxable income his distributive share of the net income of the organization for the taxable year ending with or within his taxable year, whether or not distributed, even though it may reflect certain amounts retained by the organization as a reserve for expenses.