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Guaranteed payments are payments made by a partnership to a partner for services performed in his partnership capacity or for the use of capital to the extent that the amount of the payment is not determined by reference to the partnership's income. In addition, some distributions made by a partnership in liquidation of a partner's interest in the partnership are treated as guaranteed payments. A guaranteed payment constitutes ordinary income to the partner, and the partnership is allowed a deduction for the payment unless it constitutes a capital expenditure. While guaranteed payments typically are made in cash, it is possible to make them with property in kind. Payments in kind will occur more frequently in the context of liquidating distributions, but nonliquidating guaranteed payments are possible. The principal focus of this article is on whether a partnership will recognize a gain or loss if it uses appreciated or depreciated property to make a guaranteed payment. There is no case or ruling that deals with that question. The authors conclude that: (1) the partnership does not recognize gain or loss on making a guaranteed payment in kind, (2) the partner's basis in the distributed property nevertheless equals its fair market value, and (3) the payment has no effect on the partner's basis in his partnership interest other than the reduction of that basis for the partner's share of the deduction allowed to the partnership for making the guaranteed payment.


Reprinted with the permission of Tax Analysts.