Rev. Rul. 68-138

The Internal Revenue Service has been asked whether, as a result of the provisions of section 204 of Public Law 89-809, C.B. 1966-2, 656 at 691, a partner on a calendar year basis may deduct the entire contribution made on his behalf by the partnership to its qualified plan covering self-employed individuals during the partnership's taxable year ending June 30, 1968.

A partnership established a qualified retirement plan under section 401 of the Internal Revenue Code of 1954 that included self-employed individuals. The partnership has a taxable year beginning on July 1 and ending on June 30. The individual partners have taxable years beginning on January 1 and ending on December 31. The partnership's use of a taxable year different from that of the partners in this instance is in accordance with section 706(b) of the Code.

Section 204(a) of Public Law 89-809 repealed paragraph (10) of section 404(a) of the Code limiting to 50 percent the amount allowed as a deduction for self-employed individuals for employer contributions to certain pension, etc., plans. Section 204(d) of Public Law 89-809 provides that section 204(a) shall apply with respect to taxable years beginning after December 31, 1967.

Under sections 401(c)(4) and 404(a)(8)(A) of the Code, a partnership is treated as the employer of each partner who is an employee within the meaning of section 401(c)(1) of the Code, that is, one who for other purposes is treated as self-employed.

Section 1.404(e)-1(a)(1) of the Income Tax Regulations, dealing with the deductibility of employer contributions under qualified plans covering self-employed individuals, indicates that the term "taxable year" refers to the taxable year of the employer rather than to that of each partner.

Accordingly, the fifty percent limitation imposed by section 404(a)(10) of the Code remains applicable to any contribution made by a partnership to its qualified plan on behalf of self-employed individuals in its last taxable year beginning prior to January 1, 1968. Thus, in the instant case, each partner may deduct only one-half of the contributions made for his benefit during the taxable year of the partnership ending June 30, 1968, even though the partner's taxable year began after December 31, 1967.

Computation of earned income where an individual is both a sole proprietor and a partner. See Rev. Rul. 68-176, page 168.