Guaranteed Payments Made In Kind By A Partnership

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 section 707(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.