[Code of Federal Regulations]
[Title 26, Volume 12]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1402(a)-17]

[Page 26-28]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 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

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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

[[Page 28]]

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.

[T.D. 7333, 39 FR 44446, Dec. 24, 1974]