Sorting Out Partner Payments

37 Pages Posted: 22 Feb 2022 Last revised: 15 Mar 2022

See all articles by Karen C. Burke

Karen C. Burke

University of Florida Levin College of Law

Date Written: September 3, 2021


Congress enacted section 707 in 1954 to address the tax treatment of payments by a partnership to its partners and to distinguish such payments from distributive shares of partnership income. In contrast with the aggregate approach of section 704(b) to distributive shares, sections 707(a) and 707(c) reflect an entity approach. The 1984 amendments to section 707(a) focus on entrepreneurial risk as the touchstone for distinguishing section 707(a)(2)(A) nonpartner payments from section 704(b) distributive shares. The enactment of section 707(a)(2)(A) threatened to render section 707(c) superfluous, since nonrisky payments for services were potentially subsumed under section 707(a). In 2015, the Treasury Department issued proposed regulations that confirm the continued viability of section 707(c), while modifying the “wait and-see” approach for minimum guaranteed payments. By classifying such payments under section 707(c) rather than section 707(a), however, the pro posed regulations compound the confusion concerning the respective roles of the two provisions. Moreover, the proposed regulations fail to resolve the confusion concerning the treatment of guaranteed payments for use of a partner’s capital. As commentators have recognized since 1984, section 707(c) has outlived its useful purpose. Eliminating the intermediate category of section 707(c) payments would restore the American Law Institute’s 1954 version of section 707 and finally render the “capacity” issue moot. The entrepreneurial risk standard of section 707(a)(2)(A) would provide a basis for consistent tax treatment of payments for services and capital. Given the per verse incentives under the 2017 Tax Cuts and Jobs Act to exploit the existing classification scheme, section 707(c) is no longer a harmless anomaly, and it should be repealed.

Keywords: partnerships, partners, guaranteed payments, 707

JEL Classification: K34, H24, H25, H26

Suggested Citation

Burke, Karen C., Sorting Out Partner Payments (September 3, 2021). 75 Tax Law. 2 (2021), University of Florida Levin College of Law Research Paper No. 22-12, Available at SSRN:

Karen C. Burke (Contact Author)

University of Florida Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

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