Guaranteed Payments Made in Kind By a Partnership
Douglas A. Kahn
University of Michigan Law School
affiliation not provided to SSRN
Florida Tax Review, Vol. 6, p. 405, 2004
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.
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.
There is no case, regulation or ruling expressly addressing those issues. Nevertheless, especially since liquidating distributions are sometimes made with property in kind, the issue is worthy of exploration. The issue may yet be raised by the Service. The question of the effect of a guaranteed payment, whether made in cash or in kind, on the partner's outside basis in his partnership interest will arise frequently.
Number of Pages in PDF File: 36
Keywords: Taxation, Partnership, Partner, Guaranteed Payment
JEL Classification: H20, H25
Date posted: May 2, 2007
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