Partnership Capital Gains$30,000Ordinary Income (Loss) before Guaranteed Payment0Ordinary Payment to X(10,000)Ordinary Income (Loss) after Guaranteed Payment(10,000)Distributive Share to X – Percentage30%Distributive Share to X – Dollars (Ord. Loss)(3,000)Total Ord. Income to X (Gtd. Pmt. + Dist. Share)7,000Total Capital to X9,000XYXYPartnershipGuaranteed Paymentof $10,000 & 30% oftaxable income or loss

Fixed Guaranteed Payment & Capital Gains Explained

Assume the same facts as in Example 3, except that, instead of a $9,000 loss, the partnership has $30,000 in capital gains and no other items of income or deduction except the $10,000 paid to X as a guaranteed payment.

Since the items of partnership income or loss must be segregated under section 702(a), the partnership has a $10,000 ordinary loss and $30,000 in capital gains. X’s 30 percent distributive shares of these amounts are a $3,000 ordinary loss and a $9,000 capital gain.

In addition, X has received a $10,000 guaranteed payment, which is ordinary income to him.

Key Takeaways

Character is preserved

Section 702(a) requires income items to be segregated, so the $30,000 capital gain keeps its character separate from the ordinary loss created by the guaranteed payment.

Guaranteed payment drives ordinary loss

With no other ordinary items, deducting the $10,000 guaranteed payment leaves the partnership with a $10,000 ordinary loss.

Split distributive shares

X’s 30 percent shares are a $3,000 ordinary loss and a $9,000 capital gain — the two characters do not net against each other.

Guaranteed payment is ordinary income

On top of the distributive shares, X reports the $10,000 guaranteed payment as ordinary income.

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