Rev. Rul. 68-370

Advice has been requested whether a corporation that participates in a joint venture is required to take employees of the joint venture into account in determining whether the corporation's profit-sharing plan meets the requirements of section 401(a) of the Internal Revenue Code of 1954.

M corporation and X, an unrelated corporation, are general contractors engaged in the construction business. They entered into a joint venture for the performance of construction contracts awarded to the joint venture directly or assigned to it by M or X. The joint venture has its own bank account and its own employees. None of these employees has ever, at any time, performed services directly for M or X. The joint venture pays the taxes imposed on its employees' wages by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act and withholds income tax on their wages.

M established a noncontributory profit-sharing plan for its employees under which it agreed to contribute, annually, ten percent of its net earnings.

To qualify under section 401(a) of the Code a profit-sharing plan must meet the specific coverage and nondiscrimination requirements set forth therein.

The joint venture of the two corporations is a partnership within the meaning of sections 761(a) and 7701(a)(2) of the Code. A partnership is not itself a taxable entity for Federal income tax purposes but rather is merely the aggregate of the constituent partners. See sections 701 through 703 of the Code and the Income Tax Regulations thereunder. Once the requisite employment relationship is established between the partnership and the individuals who are rendering services to the partnership, such relationship is also established between each corporate partner and the employees for purposes of sections 401 through 404 of the Code. This conclusion does not encroach upon the general 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 employment relationship must still exist between the partnership and the individual rendering services. The sole effect of such conclusion is to attribute to each partner the employment relationship that exists between the partnership and the individuals. Compare Revenue Ruling 60-379, C.B. 1960-2, 156, which involves employees of a corporation who were temporarily transferred to the corporation's joint venture.

Since the employees of the joint venture in this case are considered employees of M, it is held that such employees, and M's distributive share of the compensation paid to them, must be taken into account in determining whether M's profit-sharing plan meets the coverage and nondiscrimination requirements set forth in section 401(a) of the Code.