§ 1.1402(a)-17 Retirement payments to retired partners.
(a) In general. There shall be excluded, in computing net earnings from self-employment for taxable years ending on or after December 31, 1967, certain payments made on a periodic basis by a partnership, pursuant to a written plan of the partnership, to a retired partner on account of his retirement. The exclusion applies only if the payments are made pursuant to a plan which meets the requirements prescribed in paragraph (b) of this section, and, in addition, the conditions set forth in paragraph (c) of this section are met.
(b) Retirement plan of partnership.
(1) To meet the requirements of section 1402(a)(10), the written plan of the partnership must set forth the terms and conditions of the program or system established by the partnership for the purpose of making payments to retired partners on account of their retirement. To qualify as payments on account of retirement, the payments must constitute bona fide retirement income. Thus, payments of benefits not customarily included in a pension or retirement plan such as layoff benefits are not payments on account of retirement. Eligibility for retirement generally is established on the basis of age, physical condition, or a combination of age or physical condition and years of service. Generally, retirement benefits are measured by, and based on, such factors as years of service and compensation received. In determining whether the plan of the partnership provides for payments on account of retirement, factors, formulas, etc., reflected in public, and in broad based private, pension or retirement plans in prescribing eligibility requirements and in computing benefits may be taken into account.
(2) The plan of the partnership must provide for payments on account of retirement:
(i) To partners generally or to a class or classes of partners,
(ii) On a periodic basis, and
(iii) Which continue at least until the partner's death.
For purposes of subdivision (i) of this subparagraph, a class of
partners may, in an appropriate case, contain only one
member.
Payments are made on a periodic
basis if made at regularly recurring intervals (usually monthly) not exceeding one
year.
(c) Conditions relating to exclusion—(1) In general. A payment made pursuant to a written plan of a partnership which meets the requirements of paragraph (b) of this section shall be excluded, in computing net earnings from self-employment, only if:
(i) The retired partner to whom the payment is made rendered no service with respect to any trade or business carried on by the partnership (or its successors) during the taxable year of the partnership (or its successors), which ends within or with the taxable year of the retired partner and in which the payment was received by him;
(ii) No obligation (whether certain in amount or contingent on a subsequent event) exists (as of the close of the partnership's taxable year referred to in subdivision (i) of this subparagraph) from the other partners to the retired partner except with respect to retirement payments under the plan or rights such as benefits payable on account of sickness, accident, hospitalization, medical expenses, or death; and
(iii) The retired partner's share (if any) of the capital of the partnership has been paid to him in full before the close of the partnership's taxable year referred to in subdivision (i) of this subparagraph.
By application of
the conditions set forth in this subparagraph, either all
payments on
account of
retirement received by a retired
partner during
the taxable year of
the partnership ending within or with his
taxable year are excluded or none of
the payments are excluded. Subdivision (ii) of this subparagraph has application only to
obligations from
other partners in their capacity as
partners as distinguished from an
obligation which arose and exists from a
transaction unrelated to
the partnership or to a
trade or business carried on by
the partnership.
The effect of
the conditions set forth in subdivisions (ii) and (iii) of this subparagraph is that
the exclusion may apply with respect to
payments received by a retired
partner during
the taxable year of
the partnership ending within or with his
taxable year only if at
the close of
the partnership's taxable year
the retired
partner had no financial
interest in
the partnership except for
the right to
retirement payments.
(2) Examples. The application of subparagraph (1) of this paragraph may be illustrated by the following examples. Each example assumes that the partnership plan pursuant to which the payments are made meets the requirements of paragraph (b) of this section.
Example (1).
A, who files his
income tax returns on a
calendar year basis, is a
partner in
the ABC
partnership.
The taxable year of
the partnership is
the period July 1 to June 30, inclusive. A retired from
the partnership on January 1, 1973, and receives monthly
payments on
account of his
retirement. As of June 30, 1973, no
obligation existed from
the other partners to A (except with respect to
retirement payments under
the plan) and A's share of
the capital of
the partnership had been paid to him in full.
The monthly
retirement payments received by A from
the partnership in his
taxable year ending on December 31, 1973, are not excluded from
net earnings from self-employment since A rendered service to
the partnership during a portion of
the partnership's taxable year (July 1, 1972, through June 30, 1973) which ends within A's
taxable year ending on December 31, 1973.
Example (2).
D, a partner in the DEF partnership, retired from the partnership as of the close of December 31, 1972. The taxable year of both D and the partnership is the calendar year. During the partnership's taxable year ending December 31, 1973, D rendered no service with respect to any trade or business carried on by the partnership. On or before December 31, 1973, all obligations (other than with respect to retirement payments under the plan) from the other partners to D have been liquidated, and D's share of the capital of the partnership has been paid to him. Retirement payments received by D pursuant to the partnership's plan in his taxable year ending December 31, 1973, are excluded in determining his net earnings from self-employment (if any) for that taxable year.
Example (3).
Assume
the same
facts as in
example (2) except that as of
the close of December 31, 1973, D has a right to a fixed percentage of any
amounts collected by
the partnership after that date which are attributable to
services rendered by him prior to his
retirement for
clients of
the partnership.
The monthly
payments received by D in his
taxable year ending December 31, 1973, are not excluded from
net earnings from self-employment since as of
the close of
the partnership's taxable year which ends with D's
taxable year, an
obligation (
other than an
obligation with respect to
retirement payments) exists from
the other partners to D.
