Kellough v. Commissioner

Excerpt

As of June 13, 1983, P had been employed for over 30 years by BBSC, and been a partner in BBMP, an Ohio general partnership composed of management personnel from BBSC since August 30, 1976. On June 13, 1983, P's employment with BBSC was terminated. P believed that his termination was in contravention of BBMP's partnership agreement, and BBSC and BBMP disagreed. In order to resolve this dispute, on August 12, 1983, P, BBSC, and BBMP entered into a settlement agreement. Pursuant to the settlement agreement, P agreed among other things not to compete with BBSC for a period of two years, and in return BBSC agreed to make severance payments to P for two years. Additionally, the agreement provided that P's interest in BBMP would be liquidated through a series of three annual payments in the amount of $ 125,000 each. P attempted to establish a self-employed qualified retirement plan under sec. 401(a), I.R.C., and contributed to this plan the third installment payment in the amount of $ 125,000 that he had received from BBMP in 1986 in liquidation of his interest in the partnership. R determined that P did not meet the requirement of being an employer within the meaning of sec. 401(c)(4), I.R.C., and that P's retirement plan was not a qualified retirement plan under sec. 401(a), I.R.C. P alleges that subsequent to his termination from BBSC and BBMP, he engaged in a noncompeting beverage distributorship. The record reflects no contributions to the Plan with respect to earned income from any beverage distributorship operated by P. Held: It is appropriate to look to secs. 708, and 736, I.R.C., to determine when a partnership interest terminates for purposes of sec. 401, I.R.C. Consequently, pursuant to sec. 1.736-1(a)(6), Income Tax Regs., P was considered a partner in BBMP until he received the final payment in liquidation of his interest in the partnership. Therefore, BBMP, and not P, was P's employer within the meaning of sec. 401(c), I.R.C., and the plan was accordi