The Lazarus Effect: A Commentary on I-Kind Guaranteed Paymentss

Abstract

When he had said this, he cried with a loud voice, “Lazarus, come out!” The dead man came out, his hands and feet bound with strips of cloth, and his face wrapped in a cloth. Jesus said to them, “Unbind him, and let him go.”
– John 11:43-44

Section 707 of the Internal Revenue Code contains a number of provisions that control the tax implications of transactions involving a partnership and its partners. In particular, section 707(a) provides that a transaction between a partnership and a partner, in which the partner is not acting in his capacity as a partner, is to be treated as a transaction with a third party. Alternatively, section 707(c) provides that a transaction between a partnership and a partner, in which the partner is acting in his capacity as a partner, is also to be treated as a transaction with a third party but only for certain limited purposes and only if the payment to the partner is not determined with regard to the income of the partnership. Payments satisfying the requirements of section 707(c) are referred to as guaranteed payments.
Almost 20 years ago, in response to various congressional enactments and amendments, we authored a eulogy proposing the repeal of section 707(c). Although we may have been somewhat premature in laying to rest the concept of guaranteed payments as no longer possessing purpose or use in Subchapter K, at a minimum we viewed section 707(c) as “twisting slowly in the wind.”