## Facts

- Timothy J. Burke and Jeffrey Cohen formed a law partnership with an agreement to split proceeds evenly after a 10% origination fee.
- In 1998, the partners’ relationship deteriorated; Burke claimed Cohen violated partnership arrangements and diverted partnership funds.
- Burke sued Cohen in Massachusetts state court for breach of fiduciary duty, breach of contract, deceit, conversion, and an accounting.
- While the litigation was pending, the partners agreed that partnership receipts would be placed in an escrow account.
- Cohen filed the partnership’s 1998 return reporting $242,000 of ordinary income and allocating $121,000 to each partner as distributive share.
- Burke filed his 1998 individual return reporting zero partnership income and submitted a notice of inconsistent treatment disputing the partnership filing.
- The Commissioner issued a notice of deficiency asserting Burke failed to report his 1998 distributive share; the Tax Court granted summary judgment for the Commissioner.
- Burke appealed to the First Circuit.

## Issues

1. Whether a partner must include in income his distributive share of partnership income in the year the partnership earns it, even if the partner’s share is placed in escrow and not actually distributed due to a partner dispute.

## Decision

- The First Circuit affirmed the Tax Court’s summary judgment for the Commissioner.
- Burke was required to include his 1998 distributive share in income for 1998 despite the escrow arrangement and lack of actual receipt.
- The escrow and ongoing litigation were treated as collateral arrangements that did not alter the partnership’s 1998 income allocation for tax timing.
- Summary judgment was appropriate because the material facts were undisputed and the question was purely legal.

## Legal Principles

- Under Subchapter K, a partner is taxed on the partner’s distributive share of partnership income for the year the partnership earns the income, regardless of whether the income is actually distributed.
- Restrictions on payment or possession created by an escrow agreement between partners generally do not defer inclusion of properly allocable partnership income.
- Where the relevant facts are undisputed and only the legal effect of those facts is contested, summary judgment is proper in a tax deficiency case.

## Conclusion

The court held that a partner cannot defer tax on a distributive share of partnership income merely because the funds were placed in escrow pending resolution of a dispute; the share remains taxable in the year the partnership earns and allocates the income.


Burke v. Comm’r, 485 F.3d 171 (1st Cir. 2007)