Rev. Rul. 60-379

Advice has been requested whether a taxpayer, in computing its deductible limit for contributions to a profit-sharing trust, is entitled to take into account its distributive share of the compensation paid by a joint venture, in which it is participating, to employees covered by the taxpayer's profit-sharing plan.

The taxpayer corporation is a general contractor having a qualified profit-sharing plan for its employees. Occasionally, the taxpayer enters into a joint venture with some other contractor for the construction of a specific project. Some of the taxpayer's key employees may be assigned to perform duties for such a joint venture and during their temporary assignment the wages of these employees are paid by the joint venture rather than by the taxpayer. Nevertheless, the profit-sharing plan provides that for purposes of participation in the plan, services performed while temporarily assigned to a joint venture shall be considered as employment by the taxpayer. The plan also provides that compensation paid by the joint venture shall, for the purpose of allocating the taxpayer's annual contributions under the plan, be considered as compensation of a participating employee, that is, compensation paid by the taxpayer.

Section 404(a)(3) of the Internal Revenue Code of 1954 and section 1.404(a)-9 of the Income Tax Regulations prescribe limits for the deductibility of employer contributions under a qualified profit-sharing plan. The primary limitation is that the deduction shall not exceed 15 percent of the compensation otherwise paid or accrued during the taxable year to all employees under the profit-sharing plan.

The percentage limitations of section 404(a)(3)(A) of the Code apply to compensation otherwise paid or accrued during the taxable year to all employees under a qualified profit-sharing plan. In order to meet the qualification requirements of section 401(a) of the Code, a plan must be the plan of an employer for the exclusive benefit of his employees or their beneficiaries. It follows that the percentage limitations of section 404(a)(3)(A) apply to the compensation paid or accrued by a particular employer to his employees.

Pension, profit-sharing or stock bonus plans intended to qualify under section 401(a) of the Code may provide for continued employee participation in the event of a leave of absence for a specified purpose, provided all participants under similar circumstances are treated alike. See Part 4(b) of Rev. Rul. 57-163, C.B. 1957-1, 128, at 140. The same principal applies to employees who are loaned to another organization, such as a joint venture. In this latter case the employer-employee relationship, once established, does not terminate by reason of the employee's temporary absence from duty. However, the mere fact that a temporary absence or transfer does not terminate the employer-employee relationship, and does not disturb the employee's eligibility or participation, does not result in the conclusion that compensation paid by the actual employer (in this case, the joint venture) during such period is considered as paid by the lending employer. In determining what, if any, portion of the compensation paid by a joint venture of which the lending employer is a member may be included as compensation paid by the lending employer, in computing the deduction limitation under section 404(a)(3)(A), one must consider the provisions of subchapter K of the Code, relating to partners and partnerships.

The term `partnership' is defined in section 761(a) as including a joint venture. Accordingly, section 702 of the Code would be applicable in computing the taxpayer's income tax liability with respect to its participation in the joint venture. Section 702(a)(8) provides that, among other things, a taxpayer shall take into account its distributive share of the partnership items of deduction to the extent provided by regulations.

Section 1.702-1(a)(8)(ii) of the regulations provides, in part, that each partner must take into account separately his distributive share of any partnership item which, if separtely taken into account by any partner, would result in an income tax liability for that partner different from that which would result if that partner did not take the item into account separately.

Section 702(b) of the Code provides that the character in the hands of a partner of any item of income, gain, loss, deductioin, or credit described in section 702(a)(1) through (8) shall be determined as if such item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership.

Thus, a taxpayer's distributive share of the compensation paid by the joint venture should be taken into account by it separately, having the same character with respect to the taxpayer as it has with respect to the joint venture, if it will have the effect of permitting the taxpayer an additional deduction for contributions to its qualified profit-sharing plan by increasing is deductible limit as prescribed in section 404(a)(3)(A) of the Code. If an employee of the partnership is considered to be also an employee of the individual partners, section 702(a)(8) and section 702(b) will have the effect of permitting the taxpayer to take its distributive share of compensation paid by the joint venture into account in computing its deduction limitation for contributions to the profit-sharing plan under section 404(a)(3)(A). The sole question, therefore, is whether, for purposes of computing that limit, an employee of the partnership of which the taxpayer is a member should be considered also an employee of the taxpayer with respect to the services rendered to the partnership.

Employment, for pension trust, profit-sharing and stock bonus plan purposes, means the same, generally, as employment for other purposes, including coverage for social security or similar public programs. See Part 2(i) of Rev. Rul. 57-163, supra . Although Revenue Ruling 57-163 deals with guides for qualification of a plan, the same considerations enter into the question of the deductibility of contributions. In the instant case, for Federal employment tax purposes, an employee temporarily assigned to the joint venture is an employee of the partnership rather an employee of the partners with respect to the services rendered to the joint venture. See Rev. Rul. 54-369, C.B. 1954-2, 364. Nevertheless, once the requisite employment relationship is established as between the partnership and the individuals to whom the compensation in question is being paid, it is established also as between the individual partners and such employees for purposes of sections 401-404 of the Code. This position is consistent with the view that the partnership itself is not, for purposes of income tax liability, a taxable entity but rather is merely the aggregate of the constituent partners, each of whom is liable for income tax only in his individual capacity.

This conclusion does not encroach upon the view that `employment' for pension trust, profit-sharing and stock bonus plan purposes is the same as employment for such public programs as the Federal Unemployment Tax Act, since the essential relationship must still exist between the partnership and the individual to whom the compensation is being paid. The sole effect of this conclusion is to attribute to the individual partners the employment relationship which exists between the partnership and the individuals.

Accordingly, it is held, in the instant case, the taxpayer is entitled to take into account, in computing its deductible limit for contributions to the profit-sharing trust under section 404(a)(3)(A) of the Code, its distributive share of the compensation paid by a joint venture, in which it is participating, to emplovees covered by the taxpayer's profit-sharing plan.