Partner X in the XY partnership is to receive a payment of $10,000 for services, plus 30 percent of the taxable income or loss of the partnership.
After deducting the $10,000 payment to partner X, the XY partnership has a loss of $9,000. Of this amount, $2,700 (30 percent of the loss) is X’s distributive share of partnership loss and, subject to section 704(d), is to be taken into account by him in his return.
In addition, X must report as ordinary income the guaranteed payment of $10,000 made to him by the partnership.
The $10,000 for services is fixed and independent of partnership results, so it is a guaranteed payment even though the partnership has a loss.
Deducting the $10,000 guaranteed payment turns $1,000 of income into a $9,000 loss at the partnership level.
X’s 30 percent distributive share of the $9,000 loss is a $2,700 loss, which he takes into account subject to the section 704(d) basis limitation.
Independent of the loss, X reports the full $10,000 guaranteed payment as ordinary income.
