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Florida Tax Review

Abstract

If a partnership makes a payment to a partner for services rendered in the latter's capacity as a partner or for the use of capital, to the extent that the payment is determined without regard to partnership income, it is characterized by the Internal Revenue Code as a "guaranteed payment" and is treated differently from other partnership distributions. In addition, if a partnership makes a payment in liquidation of a retiring or deceased partner's interest in the partnership, part of that payment may be characterized as a guaranteed payment by section 736(a)(2). We will discuss in Part VI of this article the circumstances when a liquidating payment is treated as a "guaranteed payment." While section707(c) and 736(a) refer to a "payment," there is no reason that it must be made in cash, and the leading treatises on partnership taxation agree that guaranteed payments can be made in kind.

As used in this article, a "liquidating" distribution or payment refers to a partnership distribution or payment made pursuant to the liquidation of a partner's interest in the partnership. All other partnership distributions or payments are sometimes referred to as "operating" distributions or payments.

An unresolved question is whether a guaranteed payment of property in kind will cause the partnership that made the payment to recognize gain or loss if the property is appreciated or depreciated. Even if the answer to that question were affirmative, and the authors have concluded otherwise, no deduction would be allowed for a loss recognized on a payment to a person owning, directly or indirectly, more than a 50 % interest in the profits or capital of the partnership. In this article, the authors will focus on the question of the partnership's recognition of gain or loss, and will not examine questions of deductibility for a recognized loss. Two allied unresolved questions, which are discussed in this article, are: (1) how is a partner's basis in property that was received as a guaranteed payment to be determined, and (2) regardless of whether the guaranteed payment is made in cash or in kind, what effect does the payment have on the partner's outside basis in his partnership interest.

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