James A. Basye and Evelyn E. Basye v. United States

Appellee taxpayers brought these consolidated actions in the District Court for the refund of income taxes paid for the taxable years 1960 through 1963. The District Court found in their favor, 295 F.Supp. 1289 , and the government appeals. We affirm.

The case was submitted to the district court on the parties’ agreed statement of facts. Taxpayers are physicians who, during each of the tax years involved, were general partners in the Perma-nente Medical Group (Permanente), a limited partnership organized in 1949 to practice medicine in California. The Articles of Partnership provide that “all earnings by any of the partners from the practice of medicine * * * shall belong to the partnership,” and that each partner’s “compensation shall be restricted to his distributive portion of the earnings of the partnership.” Per-manente reported its income by the accrual method in the information returns that it filed for the years involved in these cases; appellees reported their individual income by the cash method.

Before the tax years in question, Per-manente contracted with Kaiser Foundation Health Plan, Inc. (Kaiser) to provide medical services to members of Kaiser in its Northern…