MINOR V. UNITED STATES
772 F.2d 1472 (9th Cir. 1985)

PROCEDURAL POSTURE: Defendant government appealed from a judgment of the United States District Court for the Western District of Washington holding that contributions to a deferred compensation plan were not currently taxable.


FACTS: Minor (P) was a doctor and he entered into an agreement with a Corporation to render medical services to its subscribers. In 1967, Corporation adopted a deferred compensation plan for its participating physician. This plan was voluntary and the doctor could elect a percentage of his fees to be put into deferred compensation. P's agreement called for 50% of fees until November 1971 and then 10% thereafter. A trust was established to handle the program. The trustees purchased retirement annuities to provide for payment of benefits under the plan. The payments were due on retirement, death, disability, or when the party left the Corporation and went to work for other companies outside the area and not competing with the Corporation. The doctors also agreed to limit their practice after retirement but to continue to provide certain emergency and consulting services and to refrain from providing medical services to competing groups. P included in gross income only the 10% of the fees he actually received. The remaining 90% went into the deferred
compensation plan. The IRS argues that P should have included in his gross income the fees that went into trust. The IRS relies on the economic benefit doctrine.

ISSUE: If a benefit is forfeitable does the economic benefit doctrine apply? Is deferred compensation taxable if the plan places the monies in trust and the employee has no right, title
or interest in the trust and future payments are contingent?

RULE OF LAW: If a benefit is forfeitable the economic benefit doctrine does not apply. A deferred compensation is not taxable if the plan places the monies in trust and the employee has no right, title or interest in the trust and future payments are contingent.

ANALYSIS: Plaintiff participated in a voluntary plan wherein he was paid a designated percentage of the ordinary fee with the balance going into a deferred compensation fund. When he only included the small percentage actually received on his federal income tax returns as gross income, the Internal Revenue Service determined that the entire amount was includible in plaintiff's gross income because an economic benefit had been conferred. At trial, plaintiff successfully contended that plan participants had no right, title, or interest in the trust agreement or any asset held by the trust, and that his right to receive payments in the future was contingent and did not vest any interest in him. On appeal, the court concluded that the plan was unfunded, unsecured, and subject to risk of forfeiture. Therefore, plaintiff's benefits were not property under 26 U.S.C.S. § 83 and 26 C.F.R. § 1.83-3.