Rev. Rul. 72-596

Advice has been requested whether premiums paid for workmen's compensation insurance on behalf of partners who work alongside employees of the partnership and are subject to the same occupational hazards are deductible by the partnership as amounts paid on behalf of persons who are employees.

Generally, workmen's compensation laws provide for compensation for the loss or impairment of an employee's wage-earning power resulting from injury or death caused by industrial accident or disease. Premiums paid by an employer for workmen's compensation insurance covering his employees are normally deductible as ordinary and necessary business expenses under section 162 of the Internal Revenue Code of 1954.

With respect to services performed by a partner for the partnership, section 1.707-1(c) of the Income Tax Regulations provides, in part, that a partner who receives guaranteed payments for a period during which he is absent from work because of personal injuries or sickness is not entitled to exclude such payments from his gross income under section 105(d) of the Code. Similarly, a partner who receives guaranteed payments is not regarded as an employee of the partnership for the purposes of withholding of tax at source, deferred compensation plans, etc.

Revenue Ruling 69-184, C.B. 1969-1, 256, holds that bona fide members of a partnership are not employees of the partnership within the meaning of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954). It also holds, in part, that a partner who devotes his time and energies in the conduct of the trade or business of the partnership is a self-employed individual rather than an individual who, under usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.

According, it is held that the principles discussed in the preceding paragraphs apply equally to the instant case and therefore premiums paid for workmen's compensation insurance on behalf of the partners are not deductible by the partnership as amounts paid on behalf of persons who are employees of the partnership.